Page 1 of 184 ENVIRONMENTAL PROTECTION AGENCY

40 CFR Part 80

[EPA-HQ-OAR-2010-0133; FRL-XXXX-X]

RIN 2060-AQ76

Regulation of Fuels and Fuel Addi tives: 2012 Renewable Fuel Standards

AGENCY: Environmental Protection Agency (EPA).

ACTION: Proposed rule.

SUMMARY: Under the Clean Air Act Section 211(o), the Environmental Protection Agency is required to set the renewable fuel standards each November for the following year. In general the standards are designed to ensure that the a pplicable volumes of rene wable fuel specified in the statute are used. However, the statue specifies that EPA is to project the volume of cellulosic biofuel production for the upcoming year and must base the cellulo sic biofuel standard on that projected volume if it is less than the applicable volume set forth in the Act. EPA is today proposing a projected cellulosic biofuel volume for 2012 and annual standards for cellulosic biofuel, biomass-based diesel, a dvanced biofuel, and renewable fuels that would apply to all gasoline and diesel produced or imported in year 2012. In addition, today's action proposes anPage 2 of 184 applicable volume of biomass-base d diesel that would apply in 2013. This action also presents a number of proposed changes to the RFS2 regulations that are designed to clarify existing provisions and to address several unique circumstances that ha ve come to light since the RFS2 program became effective on July 1, 2010. Finally, today's rule also proposes to make a minor amendment to the gasoline benzene regulations rega rding inclusion of transferred blendstocks in a refinery's early benzene credit generation calculations.

DATES: Comments must be received on or before August 11, 2011.

Hearing: We intend to hold a public hearing on July 12, 2011 in the Washington D.C. area, Details of the time and locati on of the hearing be announced in a separate notice.

ADDRESSES: Submit your comments, identified by Docket ID No. EPA-HQ-OAR-2010-0133, by one of the following methods:

• www.regulations.gov: Follow the on-line instructions for submitting comments.

• Email: asdinfo@epa.gov

.

• Mail: Air and Radiation Docket and Information Center, Environmental Protection Agency, Mailcode: 2822T, 1200 Pennsylvania Ave., NW., Washington, DC 20460.

• Hand Delivery: EPA Docket Center, EP A West Building, Room 3334, 1301 Constitution Ave., NW., Washington, DC 20460. Such deliveries are only accepted during the Docket’s normal hours of operation, and special arrangemen ts should be made for deliveries of boxed information.Page 3 of 184 Instructions: Direct your comments to Docket ID No. EPA-HQ-OAR-2010-0133. EPA's policy is that all comments received w ill be included in the public docke t without change and may be made available online at www.regulations.gov, including any personal information provided, unless the comment includes information claimed to be Confidential Business Information (CBI) or other information whose disclosu re is restricted by statute. Do not submit information that you consider to be CBI or otherwise protect ed through www.regulations.gov or e-mail. The www.regulations.gov website is an “anonymous access” system, which means EPA will not know your identity or contact information unless yo u provide it in the body of your comment. If you send an e-mail comment directly to EPA wi thout going through www.regulations.gov your e-mail address will be auto matically captured and included as pa rt of the comment that is placed in the public docket and made available on the Internet. If you submit an electronic comment, EPA recommends that you include your name and other contact information in the body of your comment and with any disk or CD-ROM you sub mit. If EPA cannot read your comment due to technical difficulties and cannot c ontact you for clarification, EPA may not be able to consider your comment. Electronic files should avoid th e use of special characters, any form of encryption, and be free of any defects or viruses. For additional inform ation about EPA’s public docket visit the EPA Docket Center homepage at http://www.epa.gov/epahome/dockets.htm. For additional instructions on submitting comments, go to Section I.B of the SUPPLEMENTARY INFORMATION section of this document.
Docket: All documents in the docket are listed in the www.regulations.gov index. Although listed in the index, some information is not pub licly available, e.g., CBI or other information whose disclosure is restricted by statute. Certain other material , such as copyrighted material, will be publicly available only in hard copy. P ublicly available docket materials are availablePage 4 of 184 either electronically in www.regulations.gov or in hard copy at the Air and Radiation Docket and Information Center, EPA/DC, EPA West , Room 3334, 1301 Constitution Ave., NW, Washington, DC. The Public Reading Room is open from 8:30 a.m. to 4:30 p.m., Monday through Friday, excluding legal holidays. The telephone number for the Public Reading Room is (202) 566-1744, and the telephone number for the Air Docket is (202) 566-1742.

FOR FURTHER INFORMATION CONTACT: Julia MacAllister, Office of Transportation and Air Quality, Assessment and Standards Division, Envi ronmental Protection Agency, 2000 Traverwood Drive, Ann Arbor MI 48105; Telephone number : 734-214-4131; Fax number: 734- 214-4816; E-mail address: macallis ter.julia@epa.gov, or Assessm ent and Standards Division Hotline; telephone number (734) 214- 4636; E-mail address asdinfo@epa.gov.

SUPPLEMENTARY INFORMATION:

I. General Information

A. Does this Action Apply to Me?

Entities potentially affected by this proposed rule are those involved with the production, distribution, and sale of transpor tation fuels, including gasoline and diesel fuel or renewable fuels such as ethanol and biodiesel. Potentially regulated categories include:Page 5 of 184 Category NAICS 1 Codes SIC 2 Codes Examples of Potentially Regulated Entities Industry Industry Industry Industry Industry Industry Industry 324110 325193 325199 424690 424710 424720
454319 2911 2869 2869 5169 5171 5172
5989 Petroleum Refineries Ethyl alcohol manufacturing Other basic organic chemical manufacturing Chemical and allied products merchant wholesalers Petroleum bulk stati ons and terminals Petroleum and petroleu m products merchant wholesalers Other fuel dealers 1 North American Industry Cl assification System (NAICS) 2 Standard Industrial Classi fication (SIC) system code.

This table is not intended to be exhaustiv e, but rather provides a guide for readers regarding entities likely to be regulated by this proposed action. This table lists the types of entities that EPA is now aware could potentially be regulated by this proposed action. Other types of entities not listed in the table could also be regulated. To determine whether your activities would be regulated by this propos ed action, you should carefully examine the applicability criteria in 40 CFR part 80. If you have any questions regarding the applicability of this proposed action to a particul ar entity, consult the person listed in the preceding section.

B. What Should I Consider as I Prepare My Comments for EPA?

1. Submitting CBI

Do not submit confidential business information (CBI) to EPA through www.regulations.gov or e-mail. Clearly mark the part or all of the information that you claim to be CBI. For CBI information in a disk or CD ROM that you mail to EPA, mark the outside of the disk or CD ROM as CBI and then identify electronically within the disk or CD ROM thePage 6 of 184 specific information that is claimed as CBI. In addition to one complete version of the comment that includes information claimed as CBI, a co py of the comment that does not contain the information claimed as CBI must be submitted for inclusion in the public docket. Information so marked will not be disclosed except in accordance with procedures set forth in 40 CFR part 2.

2. Tips for Preparing Your Comments

When submitting comments, remember to: • Identify the rulemaking by docket number and other identifying information (subject heading, Federal Register date and page number). • Follow directions - The agency may ask you to respond to specific questions or organize comments by referencing a Code of Federal Regulations (CFR) part or section number. • Explain why you agree or disagree, suggest alternatives, and substitute language for your requested changes. • Describe any assumptions a nd provide any technical inform ation and/or data that you used. • If you estimate potential costs or burdens, explain how you arrived at your estimate in sufficient detail to allow for it to be reproduced. • Provide specific examples to illustrate your concerns, and suggest alternatives. • Explain your views as clearly as possible, avoiding the use of profanity or personal threats. • Make sure to submit your comments by the comment period deadline identified.Page 7 of 184 Outline of this preamble I. Executive Summary A. Standards For 2012 1. Assessment Of 2012 Cellulosic Biofuel Volume 2. Advanced Biofuel And Tota l Renewable Fuel In 2012 3. Proposed Percentage Standards For 2012 B. Proposed 2013 Biomass-Based Diesel Volume C. Proposed Regulatory Changes D. Petition For Reconsideration II. Projection Of Cellulosic Volu me Production And Imports For 2012 A. Statutory Requirements B. Cellulosic Biofuel Volume Assessment 1. Existing Cellulosic Biofuel Facilities 2. Potential New Facilities In 2012 3. Imports Of Cellulosic Biofuel 4. Summary Of Volume Projections C. Potential Limitations In 2012 D. Advanced Biofuel And Total Renewable Fuel In 2012 E. Biomass-Based Diesel In 2012 III. Proposed Percentage Standards For 2012 A. Background B. Calculation Of StandardsPage 8 of 184 1. How Are The Standards Calculated? 2. Small Refineries And Small Refiners 3. Proposed Standards IV. Biomass-Based Diesel Volume For 2013 A. Statutory Requirements B. Factors Considered In Assessing 2013 Biomass-Based Diesel Volumes 1. Demand For Biomass-Based Diesel 2. Availability Of Feedstocks To Produce 1.28 Billion Gallons Of Biodiesel 3. Production Capacity 4. Consumption Capacity 5. Biomass-Based Diesel Di stribution Infrastructure C. Impacts Of 1.28 Billion Gallons Of Biomass-Based Diesel 1. Climate Change 2. Energy Security4 3. Agricultural Commodities And Food Prices 4. Air Quality 5. Transportation Fuel Cost 6. Deliverability And Transport Costs Of Ma terials, Goods, And Products Other Than Renewable Fuel 7. Wetlands, Ecosystems, And Wildlife Habitats 8. Water Quality And Quantity a. Impacts On Water Quality And Water Quantity Associated With Soybean Production b. Impacts On Water Quality And Water Quantity Associated With Biodiesel ProductionPage 9 of 184 9. Job Creation And Rura l Economic Development D. Proposed 2013 Volume For Biomass-Based Diesel E. 2014 And Beyond V. Proposed Changes To Rfs2 Regulations A. Summary Of Amendments B. Technical Justification For Equivalence Value Application C. Changes To Definitions Of Terms 1. Definition Of Annual Cover Crop 2. Definition Of "Naphtha" D. Technical Amendments Related To Rin Generation And Separation 1. Rin Separation Limit For Obligated Parties 2. Rin Retirement Provision For Error Correction 3. Production Outlook Reports Submission Deadline 4. Attest Procedures 5. Treatment Of Canola And Rapeseed E. Technical Amendments Related To Registration 1. Construction Discontinuance & Completion Documentation 2. Third-Party Engineering Reviews 3. Foreign Ethanol Producers F. Additional Amendments And Clarifications 1. Third-Party Engineering Review Addendum 2. Rin Generation For Fuel Imported Fr om A Registered Foreign Producer 3. Bond PostingPage 10 of 184 4. Acceptance Of Separated Yard Waste And Food Waste Plans 5. Transferred Blendstocks In Early Be nzene Credit Generation Calculations VI. Petition For Reconsideration A. Legal Considerations Of Petition B. Advanced Biofuel Standard And Delayed Rins C. 2011 Cellulosic Bi ofuel Requirement VII. Public Participation A. How Do I Submit Comments? B. How Should I Submit Cbi To The Agency? VIII. Statutory And Executive Order Reviews A. Executive Order 12866: Regulatory Planni ng And Review And Executive Order 13563: Improving Regulation And Regulatory Review B. Paperwork Reduction Act C. Regulatory Flexibility Act D. Unfunded Mandates Reform Act E. Executive Order 13132: Federalism F. Executive Order 13175: Consultation And Coor dination With Indian Tribal Governments G. Executive Order 13045: Protection Of Childre n From Environmental Health Risks And Safety Risks H. Executive Order 13211: Actions Concerning Regulations That Significantly Affect Energy Supply, Distribution, Or Use I. National Technology Transfer Advancement ActPage 11 of 184 J. Executive Order 12898: Federal Actions To Address Environmental Justice In Minority Populations And Low-Income Populations IX. Statutory AuthorityPage 12 of 184 I. Executive Summary

The Renewable Fuel Standard (RFS) progra m began in 2006 pursuant to the requirements in Clean Air Act (CAA) section 211(o) which we re added through the Energy Policy Act of 2005 (EPAct). The statutory requirements for the RF S program were subsequently modified through the Energy Independence and Security Act of 2007 (EISA), resulting in the promulgation of revised regulatory requirements on March 26, 2010 1 . The transition from the RFS1 requirements of EPAct to the RFS2 requirements of EISA generally occurred on July 1, 2010.

Under RFS2, EPA is required to determine a nd publish the applicable annual percentage standards for each compliance year by November 30 of the previous year. As part of this effort, EPA must determine the project ed volume of cellulosic biofue l production for the following year. If the projected volume of cellulosic biof uel production is less than the applicable volume specified in section 211(o)(2)(B)(i)(III) of the statute, EPA must lowe r the applicable volume used to set the annual cellulos ic biofuel percentage standard to the projected volume of production. When we lower the applicable volume of cellulosic biofuel in this manner, we are also authorized to lower the applicable volumes of advanced biofuel and/ or total renewable fuel by the same or a lesser amount. Since these ev aluations will be based on evolving information about emerging segments of the biofuels indus try, and may result in the applicable volumes differing from those in the statute, we believe that it is appropriate to establish the applicable volumes through a notice-and-comment rulemaki ng process. Today's notice provides our proposed evaluation of the projected production of cellulosic biofuel for 2012, our proposed evaluation of whether to lower the applicable vol umes of advanced biof uel and total renewable

1 75 FR 14670Page 13 of 184 fuel, and the proposed percentage standards fo r compliance year 2012. We will complete our evaluation based on comments received in response to this proposal, the estimate of projected biofuel volumes that the EIA is required to provi de to EPA by October 31, and other information that becomes available, and will make final determinations of applicable volumes and percentage standards for 2012 by November 30, 2011.

The statute also requires EPA to determin e and promulgate the applicable volume of biomass-based diesel that will be required in 2013 and beyond, as the statute does not specify the applicable volumes for years after 2012. This de termination must be made at least 14 months prior to the year in which the volume will be required. Thus, for the 2013 compliance year, we must specify the applicable vol ume of biomass-based diesel by November 1, 2011. The statute identifies a number of factors that EPA must take into consideration in establishing the applicable volume of biomass- based diesel for years after 2012. Today's notice includes our proposed assessment of these factors and proposed applicable volume of biomass-based diesel for 2013.

Today's proposed rule does not include an assessment of the envi ronmental impacts of the percentage standards we are proposing for 2012. All of the impacts of the RFS2 program were addressed in the RFS2 final rule pub lished on March 26, 2010, including impacts of the biofuel standards specified in the statute. Toda y's rulemaking simply proposes the standards for 2012 whose impacts were already analyzed previous ly. However, as described more fully in Section IV.A, we are required to analyze a sp ecified set of environm ental and economic impacts for the biomass-based diesel vol ume we are proposing for 2013.Page 14 of 184 Today's notice also proposes a number of changes to the RFS2 regulations. These changes are designed to reduce confusion among regulated parties and streamline implementation by clarifying certain terms and ph rases and addressing uni que circumstances that came to light after the RFS2 program went into effect on July 1, 2010. Additionally, this notice also proposes to make a minor amendment to the gasoline benzene regulations regarding inclusion of transferred blendstocks in a refine ry’s early benzene credit generation calculations. Further discussion of all of these propos ed changes can be found in Section V.

Finally, we note that in the RFS2 final ru le we also stated our intent to make two announcements each year:

• Set the price for cellulosic biofuel waiver credits that will be made available to obligated parties in the event that we reduce the volume of cellulosic biofuel below the volume required by EISA.

• Announce the results of our assessment of the aggregate compliance approach for verifying renewable biomass requirement s for U.S. crops and crop residue, and our conclusion regarding whether the aggregate compliance provision will continue to apply.

For both of these determinations, EPA will use sp ecific sources of data and a methodology laid out in the RFS2 final rule. Since the necessa ry data for these determinations are not yetPage 15 of 184 available, and the methodology for making them is specified by rule or statute, we are not including proposed determinations in this Notice. We will present the results of both of these determinations in the final rule without a prior proposal.

A. Standards for 2012

1. Assessment of 2012 Cellulosic Biofuel Volume

To estimate the volume of cellulosic biofuel that could be made available in the U.S. in 2012, we researched all potentia l production sources by company and facility. This included sources that were still in the planning stages, those that were under construction, and those that are already producing some volume of cellulosic etha nol, cellulosic diesel, or some other type of cellulosic biofuel. Facilities primarily focused on research and development work with no intention of marketing any fuel produced were not considered for this assessment. From this universe of potential cellulosic biofuel sources we identified the subset that had a possibility of producing some volume of qualifying cellulosic bi ofuel for use as transportation fuel in 2012. For the final rule, we will specify the projecte d available volume for 2012 that will be the basis for the percentage standard for cellulosic biofuel. To determine this final projected available volume, we will consider additiona l factors such as the current a nd expected state of funding, the status of the technology, and progress towards construction and production goals along with any other significant factors that could potentially impact fuel production or the ability of thePage 16 of 184 produced fuel to generate cellulosic RINs. This information, to the extent that it is publically available, is discussed in fu rther detail in Section II.B.

In our assessment we focused on domestic sour ces of cellulosic biofuel. While imports of cellulosic biofuels are possible and would be el igible to generate RINs, we believe this is unlikely due to local demand for cellulosic biofuels in the countries in which they are produced as well as the cost associated with transporting these fuels to the U.S. Of the domestic sources, we estimated that nine facilities have the potential to make volumes of cellulosic biofuel available for transportation use in the U.S. in 2012. These facilities are listed in Table I.A.1-1 along with our estimate of the potentially available volume.

Table I.A.1-1 Potentially Available Cellulosic Biofuel Plant Volumes for 2012

Company Location Fuel type Potentially available volume (million ethanol-equivalent gallons) DuPont Danisco Cellulosic Ethanol Vonore, TN Ethanol 0.25 Fiberight Blairstown, IA Ethanol 3.0 Fulcrum Bioenergy McCarran, NV Ethanol 0.5 INEOS Bio Vero Beach, FL Ethanol 3.0 KiOR Houston, TX Gasoline, Diesel 0.3 KiOR Columbus, MS Gasoline, Diesel 6.4 KL Energy Corp. Upton, WY Ethanol 1.0 Terrabon Port Arthur, TX Gasoline 1.0 ZeaChem Boardman, OR Ethanol 0.25 Total 15.7

The volumes in Table I.A.1-1 for each f acility represent the volume that would be produced in 2012 based upon the owner's expected month of startup and an assumed period of production rampup to full capacity for testing a nd process validation pur poses. However, none of the facilities we evaluated are currently producin g cellulosic biofuel at the rates they projectPage 17 of 184 for 2012. Moreover, there are other uncertainties associated with each facility's projected volume that could result in less production volume in 2012 than the potentially available values shown in Table I.A.1-1. Therefore, we are pr oposing a range of volumes for cellulosic biofuel for 2012, with 15.7 million ethanol-equiva lent gallons as the upper end of the range. For the lower end of the range, we believe that a volume of 3.55 million etha nol-equivalent gallons could be justified based on currently ava ilable information. This volume is based on consideration of only those facilities that are struct urally complete at the time of this proposal and that anticipate commercial production of cellulosic biofuels by the end of 2011. More complete information on the progr ess of the industry in 2011 will be available for the final rule, and will allow us to make a mo re accurate projection of cellu losic biofuel volume for 2012. A more detailed discussi on of these uncertainties is pr esented in Section II.B.

2. Advanced Biofuel and To tal Renewable Fuel in 2012

The statute indicates that we may reduce th e applicable volume of advanced biofuel and total renewable fuel if we de termine that the projected volum e of cellulosic biofuel production for 2012 falls short of the statutory volume of 500 million gallons. As shown in Table I.A.1-1, we are proposing a determination that this is the cas e. Therefore, we also must evaluate the need to lower the applicable volumes for advan ced biofuel and total renewable fuel.

To address the need to lower the advanced biofuel standard, we fi rst consider whether it appears likely that the biomass-based diesel volum e of 1.0 billion gallons sp ecified in the statutePage 18 of 184 can be met in 2012. As discussed in Section II.E , we believe that the 1.0 billion gallon standard can indeed be met. Since biodiesel has an E quivalence Value of 1.5, 1.0 billion physical gallons of biodiesel would provide 1.5 billion ethanol-equiv alent gallons that can be counted towards the advanced biofuel standard of 2.0 billion gallons. Of the remaining 0.5 bill gallons, up to 0.016 bill gallons would be met with the proposed volume of cellulosic biofuel. Based on our analysis as described in Section II.D, it appears likely that there will be sufficient volumes of other advanced biofuels, such as imported sugarcane et hanol, additional biodiesel , or renewable diesel, such that the standard for advanced biofuel c ould remain at the statutory level of 2.0 billion gallons. However, uncertainty in the potential vol umes of these other advanced biofuels coupled with the range of potential production volumes of cellulosic biofuel could provide a rationale for lowering the advanced biofuel standard. If we lowered the applicable volume of advanced biofuel without simultaneously lowering the a pplicable volume for total renewable fuel, the result would be that additional volumes of conventional renewabl e fuel, such as corn-starch ethanol, would be produced, effectively replacing so me advanced biofuels. In today's NPRM we are proposing that neither the required 2012 volumes for advanced biofuel nor total renewable fuel be lowered below the statutory volumes. However, we request comment on whether the advanced biofuel and/or total renewable fuel volume require ments should be lowered if, as we propose, EPA lowers the required cellulosic biof uel volume from that specified in the Act.

3. Proposed Percentage Standards for 2012Page 19 of 184 The renewable fuel standards are expressed as a volume percentage, and are used by each refiner, blender or importer to determine their renewable fuel volume obligations. The applicable percentages are set so that if each regulated party meets the percentages, and if EIA projections of gasoline and diesel use are accurate, then the amount of renewable fuel, cellulosic biofuel, biomass-based diesel, and advanced biofuel used will meet the volumes required on a nationwide basis.

To calculate the percentage standard fo r cellulosic biofuel for 2012, we have used a potential volume range of 3.55 - 15.7 million ethanol -equivalent gallons (representing 3.45 - 12.9 million physical gallons). For the final rule, EPA intends to pick a single value from within this range to represent the projected available vol ume on which the 2012 percentage standard forcellulosic biofuel will be based. We are also proposing that the applicable volumes for biomassbased diesel, advanced biofuel, and total renewable fuel for 2012 will be those specified in the statute. These volumes are shown in Table I.A.3-1.

Table I.A.3-1 Proposed Volumes for 2012 Actual Volume Ethanol Equivalent Volume a Cellulosic biofuel 3.45 - 12.9 mill gal 3.55 - 15.7 mill gal Biomass-based diesel 1.0 bill gal 1.5 bill gal Advanced biofuel 2.0 bill gal 2.0 bill gal Renewable fuel 15.2 bill gal 15.2 bill gal

a Biodiesel and cellulosic diesel have equivalence values of 1.5 and 1.7 ethanol equivalent gallons respectively. As a result, ethanol-equivalent volumes are larger than actual volumes for cellulosic biofuel and biomass-based diesel.
Four separate standards are required under th e RFS2 program, corresponding to the four separate volume requirements shown in Table I.A.3-1. The specific formulas we use to calculatePage 20 of 184 the renewable fuel percentage standards ar e contained in the regulations at §80.1405 and repeated in Section III.B.1. The percentage st andards represent the ratio of renewable fuel volume to projected non-renewable gasoline and diesel volume. The projected volume of gasoline used to calculate the standards in t oday's proposal is provided by EIA's Short-Term Energy Outlook (STEO) 2 . The projected volume of transporta tion diesel used to calculate the standards in today's proposal is provided by EIA's 2011 Annual Energy Outlook (early release version). For the final rule, we will use updated projections of gasoline and diesel provided by
EIA.

Because DOE’s 2009 analysis 3 concluded that small re fineries would not be disproportionately harmed by inclusion in the RFS program, beginning in 2011, small refiners and small refineries participated in the RFS pr ogram as full regulated parties, and there was no small refiner/refinery volume adjustment to the 2011 standard as there was for the 2010 standard. However, DOE recently re-evaluated the impacts of the RFS program on small entities and concluded that some small refine ries would suffer a disproporti onate hardship if required to participate in the program 4 . As a result, we are required to exempt these few refineries from being obligated parties for a minimum of two year s, and must also exempt their gasoline and diesel volumes from the calculati on of the annual percentage standards. The proposed standards for 2012 are shown in Table I.A.3-2 and include the adjustment for exem pt small refineries (which constitute about 2.5% of both gasoline and diesel pools). Detailed calcul ations can be found in Section III.

2 The April 2011 issue of STEO was used for today's proposal. 3 DOE report “EPACT 2005 Section 1501 Small Refineries Exemption Study”, (January, 2009). 4 "Small Refinery Exemption Study: An Investigation into Disproportionate Economic Hardship," U.S. Department of Energy, March 2011.Page 21 of 184 Table I.A.3-2 Proposed Percentage Standards for 2012 Cellulosic biofuel 0.002 to 0.010% Biomass-based diesel 0.91% Advanced biofuel 1.21% Renewable fuel 9.21%

B. Proposed 2013 Biomass-Based Diesel Volume

While section 211(o)(2)(B) specifies the volum es of biomass-based diesel (BBD) through year 2012, it directs the EPA to establish the a pplicable volume of BBD for years after 2012 no later than 14 months before the first year for which the applicable volume will apply. In today's action we are proposing an applicable volume of 1.28 bill gallons for biomass-based diesel (BBD) for 2013. This is the volume that was pr ojected for 2013 in the RFS2 final rulemaking, and we are proposing it for 2013 base d on consideration of the factors specified in the statute, including a consideration of biodiesel producti on, consumption, and infrastructure issues. As required under the statute, we also assessed the likely impact of BBD production and use in a variety of areas, including climate change, energy security, the agricultural sector, air quality, and others. Section IV provide s additional discussion of our a ssessment of the proposed volume of 1.28 bill gallons of BBD.

C. Proposed Regulatory Changes

In today's action we are also proposing a number of changes to the RFS2 regulations. These proposed changes are intended to:Page 22 of 184 • Clarify certain provisions because we have learned that there is some confusion among some regulated parties • Clarify the application of certain provisions to unique circumstances • Provide greater specificity in the definition of certain terms • Correct regulatory language that in advertently misrepresented our intent

Today's rule also proposes to make a minor amendment to the gasoline benzene regulations regarding inclusion of transferred blendstocks in a refinery's early benzene credit generation calculations. A detailed discussi on of these proposed regulatory changes is provided in Section
V.

D. Petition for Reconsideration

The American Petroleum Institute (API) and the National Petrochemical and Refiners Association (NPRA) jointly submitted a Petition for Reconsideration of EPA’s final rule establishing the RFS standards for 2011. The pe tition requests that we lower the 2011 cellulosic biofuel standard to no more than 3.94 mill gallons , lower the 2011 advanced biofuel standard in concert with the reduction in the cellulosi c biofuel standard from 250 mill gallons, and reconsider the regulatory provision for delayed RINs. We are proposing to deny this petition. See Section VI for further discussion.Page 23 of 184 II. Projection of Cellulosic Volu me Production and Imports for 2012

In order to project production volume of ce llulosic biofuel in 2012 for use in setting the percentage standard, we collected information on individual facilities that have the potential to produce qualifying volumes for consumption as trans portation fuel, heating oil, or jet fuel in the U.S. in 2012. This section describes the range of volumes that could be produced and imported in 2012 as well as some of the uncertainties associated with those volumes. For today's NPRM we have assessed the range of potentially available volumes for 2012. Despite significant advances in cellulosic biofuel production technology in recent ye ars the production of cellulosic biofuel remains highly uncertain. While we expect that the volume we select in the final rule for use in setting the 2012 cellulosic biofuel percentage standard will be within our proposed range of volumes, we recognize the possibility that update d information at the time of the final rule could result in the final volume falling outside of the proposed rang e. Section III describes the conversion of our proposed range of volumes fo r cellulosic biofuel into a range of possible percentage standards.

While the proposed 2012 volume projections in today's NPRM were based on our own assessment of the cellulosic biofuel industry, by the time we announce the final 2012 volumes and percentage standards we will have additional information. Firs t, in addition to comments in response to today's proposal, we will have updated and more detailed inform ation about how the industry is progressing in 2011. Second, all regist ered producers and importers of renewable fuel must submit Production Outlook Repor ts describing their expect ations for new or expanded biofuel supply for the next five years, according to §80.1449. Finally, by October 31, 2011, thePage 24 of 184 Energy Information Administration (EIA) is required by statute to provide EPA with an estimate of the volumes of transportation fuel, biomass- based diesel, and cellulosic biofuel that they project will be sold or introduced into commerce in the U.S. in 2012.

A. Statutory Requirements

The volumes of renewable fuel to be used under the RFS2 program each year (absent an adjustment or waiver by EPA) are specified in CAA 211(o)(2). These volumes for 2012 are shown in Table II.A-1.

Table II.A-1 Required Volumes in the Clean Air Act for 2012 (bill gal) Actual Volume Ethanol Equivalent Volume Cellulosic biofuel 0.5 a 0.5 Biomass-based diesel 1.0 1.5 Advanced biofuel 2.0 a 2.0 Renewable fuel 15.2 a 15.2
a These values assume that the biofuels would be ethanol. If any portion of the biofuels used to meet these applicable volumes has a volumetric energy content greater than that for ethanol, these values will be lower.
By November 30 of each year, the EPA is re quired under CAA 211(o) to determine and publish in the Federal Register the renewable fuel per centage standards for the following year. These standards are to be based in part on transportation fuel volumes estimated by the Energy Information Administration (EIA) for the following year. The calculation of the percentage standards is based on the formulas in §80.1405( c) which express the required volumes of renewable fuel as a volume percentage of gasolin e and diesel sold or introduced into commerce in the 48 contiguous states plus Hawaii.Page 25 of 184 The statute requires that if EPA determines that the projected volume of cellulosic biofuel production for the following year is less than the applicable volume shown in Table II.A-1, then EPA is to reduce the applicable volume of cellu losic biofuel to the pr ojected volume available during that calendar year. In addition, if EPA reduces the required volume of cellulosic biofuel below the level specified in the statute, the Act also indicates that we may reduce the applicable volume of advanced biofuels a nd total renewable fuel by th e same or a lesser volume.

As described in the final rule for the RFS2 program, we intend to examine EIA’s projected volumes, comments on this proposal, production outlook reports, and other available data in making a final determin ation of the appropriate cellulosi c biofuel volumes to require for
2012.

B. Cellulosic Biofuel Volume Assessment

The task of projecting the volume of cellu losic biofuel production for 2012 remains a difficult one. Currently there are very few, if any, facilities consiste ntly producing cellulosic biofuel for commercial sale. Announcements of new projects a nd project funding, changes in project plans, project delays, and cancellations oc cur frequently. Biofuel producers face not only the challenge of the scale up of innovative, first- of-a-kind technology, but also the challenge of securing funding in a difficult economy. The ce llulosic biofuel industry also is influenced byPage 26 of 184 various tax credits and subsidies, and change s to these programs could have an impact on cellulosic biofuel production.

In order to project cellulosic biofuel production for 2012, EPA has tracked the progress of over 100 biofuel producti on facilities. From this list of f acilities we used publically available information, as well as information provide d by DOE and USDA, to make a preliminary determination of which facilities are the most likely candidate s to produce cellulosic biofuel and make it commercially ava ilable in 2012. Each of these companies was investigated further in order to determine the current status of their facilities and their likely cellulosic biofuel production volumes for the coming years. Inform ation such as the funding status of these facilities, announced constructi on and production ramp up periods , and annual fuel production targets were taken into account. Our projection of the range of cellulosic biofuel production in 2012 is based on this information as well as our own assessment of the likelihood of these facilities successfully producing ce llulosic biofuel in the volumes indicated. A brief description of each of the companies we believe may produ ce cellulosic biofuel a nd make it commercially available in 2012 can be found below. We will c ontinue to gather more information to help inform our decision on the final cellulosic biofue l standard for 2012, and we will specify a single volume in the final rule that will be the basis fo r the cellulosic biofuel percentage standard for
2012.

1. Existing Cellulosic Biofuel FacilitiesPage 27 of 184 The rule that established the required 2011 cellulosic biofuel volume identified five production facilities that we projected would produce cellulo sic biofuel and make the fuel commercially available in 2011. Each of th ese production facilities are now structurally complete, however they are in various stages of biofuel production. All of these facilities have either produced some volume of cellulosic biofue l in 2011, or are on schedule to do so later in the year. Only Range Fuels, however, has comp leted its registration as a cellulosic biofuel production facility under the RFS2 pr ogram and as such they are currently the only facility of the five listed here currently eligible to genera te cellulosic biofuel RINs. For more background information on each of these facilities see the 2011 standards rule 5

.

DuPont Danisco Cellulosic Ethanol (DDC E) successfully started up their small demonstration facility in Vonor e, Tennessee in late 2010. This facility has a maximum production capacity of 250,000 gallons of ethanol pe r year and uses an enzymatic hydrolysis process to convert corn cobs into ethanol. In conversations with EPA in early 2011 DDCE indicated that they had not encountered an y unexpected difficulties in their production of cellulosic ethanol and were on target to m eet their 2011 production goal of 150,000 gallons of cellulosic ethanol. It is likely that in 2012 ce llulosic biofuel production at this facility will approach the production capacity of 250,000 gallons of cellulosic ethanol.

Fiberight uses an enzymatic hydrolysis pr ocess to convert the biogenic portion of separated municipal solid waste (MSW) into ethanol. Construction on the first stage of Fiberight’s Blairstown, Iowa facility was co mpleted in the summer of 2010. The production capacity of the first stage of this project is 2 million gallons of ethanol per year. Fiberight had

5 75 FR 76790, December 9, 2010.Page 28 of 184 planned to begin production of cellulosic biofuel from this facility in late 2010 but poor economic conditions, due in part to low cellulosic RIN values in 2010, caused them to postpone fuel production. Fiberight had also planned to be gin construction on an expansion of this facility in late 2010 that would increase the production pot ential to 6 million gallons of ethanol per year, but were unable to secure funding to carry out the construction as planned. They have since secured funding and began construction on the expa nsion of their Blairstown facility in April 2011. Fiberight anticipates that they will begi n fuel production in the late summer of 2012 and will ramp up production at th is facility throughout 2012, pr oducing approximately 3 million gallons of cellulosic ethanol in 2012.

KiOR continues to produce a small volume of renewable crude from agricultural residue at their demonstration facility in Houston, Texa s using a technology they call Biomass Catalytic Cracking (BCC). This technology uses heat and a proprietary catalyst to convert biomass to a renewable crude with a relatively low oxygen content. This facility currently lacks the infrastructure to upgrade this renewable crude to finished transportati on fuel, however KiOR plans to add this capability at this facility in la te 2011. While KiOR has not yet registered under the RFS2 program, their fuel, if refined to gasoline or diesel fuel would be eligible to generate RINs. EPA currently projects a production vol ume of 200,000 gallons of cellulosic fuel from KiOR, which could potentially generate 300,000 RINs.

KL Energy has developed a process to c onvert cellulose and hemicelluloses into cellulosic sugars using a thermal-mechanical pretreatment process followed by an enzymatic hydrolysis. They had initially planned to used woody biomass as their feedstock for cellulosicPage 29 of 184 biofuel production; however their production process is versatile enough to allow for a wide variety of cellulosic feedstocks to be used. In August 2010 KL Energy announced a joint development agreement with Petrobras America Inc. As part of the agreement Petrobras will invest $11 million to modify KL Energy’s facility in Upton, Wyoming to allow it to process bagasse and other waste products. These modifi cations are expected to be completed in 2011, and fuel production is likely to begin soon after. If successful, Petrobras and KL Energy plan to work together to integrate the technology into currently existing ethanol production facilities in Brazil. KL Energy has also indentified several sites in the United States for possible future expansion. EPA currently projects that KL Energy could produce up to 1 million gallons of cellulosic ethanol in 2012 in the United States.

Range Fuels began production of methanol at their Soperton, Georgia facility in the third quarter of 2010. This facility uses a thermoch emical technology to produce syngas (consisting of mostly hydrogen and carbon monoxide) from a woody biomass feedstock. The syngas is then converted into fuel with the aid of a chemi cal catalyst developed by Range. Range has developed the capability to produce both methanol and ethanol, depending on the catalyst used. In January 2011, after producing a small volume of ethanol from this facility and proving this capability, Range Fuels shut down the Soperton facility in order to work through technical difficulties they had been experiencing. No timeline has been given for the restart of this facility. EPA will continue to gather information and monitor progress at the Soperton facility. At this time, however, since no timeline has been provided fo r production from this facility, we are not projecting any volume from this facility in 2012.Page 30 of 184 2. Potential New Facilities in 2012

EPA is also aware of five new cellulosic biofuel production facilities that are currently planning to begin commercial production at some point in 2012. These facilities are at various stages in the construction process, and as such have various degrees of uncertainty associated with any projected 2012 commercial production. While it is possible that several of these facilities will not begin production of cellulosic biofuels until 2013, they are nevertheless considered here since some commercial volumes can pot entially be produced in 2012.

Fulcrum Bioenergy is planning to build a facility capable of producing 10.5 million gallons of cellulosic ethanol a nd 16 megawatts of renewable elec tricity per year. They have developed a thermochemical technology to pr oduce ethanol from separated MSW via syngas using a chemical catalyst. In November 2010 Fu lcrum announced that they had received a term sheet for a $80 million loan guarantee from DOE and were entering into the final phase of the loan guarantee program. Prior to that Fulcrum had announced that they had signed long term feedstock supply contracts for this facility as we ll as engineering, procurement, and construction contracts. In January 2011 Fulcrum announ ced they had closed on a $75 million Series C financing that would provide the remaining necessary capital for the construction of their first commercial production facility pending the closing of their DOE loan guarantee. They announced that they are now planning to begin construction in the second quarter of 2011 and complete the facility by late 2012. EPA currentl y projects a potential production volume of up to 0.5 million gallons of cellulosic ethanol from this facility in 2012.Page 31 of 184 INEOS Bio has developed a process for produ cing cellulosic ethanol by first gasifying feedstock material into a syngas and then using naturally occurring bacteria to ferment the syngas into ethanol. In January 2011 USDA announced a $75 million loan guarantee for the construction of INEOS Bio’s first commercial facility to be built in Vero Beach, Florida. This facility will be capable of producing 8 million ga llons of cellulosic biofuel as well as 6 megawatts of renewable electricity from a variety of feedstocks including yard, agricultural, and wood waste, as well as separated MSW. On February 9, 2011 INEOS Bio broke ground on this facility. INEOS Bio expects to complete constr uction on this facility in April 2012 and plans to begin commercial production of ce llulosic ethanol soon after cons truction is complete. EPA currently projects a potential production volume of up to 3 million gallons of cellulosic ethanol from this facility in 2012.

After successful operation of their demons tration plant in Houston, Texas KiOR is planning to begin construction on their first commercial scale facility in early 2011. This facility, located in Columbus, Mississippi, will c onvert biomass to a low oxygen biocrude using a process KiOR calls Biomass Catalytic Cracki ng (BCC). BCC uses a catalyst developed by KiOR in a process similar to Flui d Catalytic Cracking currently used in the petroleum industry. KiOR’s Columbus facility will also be capable of upgrading this biocrude into finished gasoline and diesel as well as a small quantity of fuel oil. KiOR plans to begin production from this facility sometime in the first ha lf of 2012. KiOR has also announc ed plans to construct several more commercial scale biofuel production facilities in Mississippi and across the southeastern United States. However, it is unlikely any of these facilities will begin production of biofuel inPage 32 of 184 2012. Given this timeline EPA currently proj ects a potential production of up to 4.0 million gallons of gasoline and diesel (6.4 million ethanol equivalent gallons) from the Columbus facility in 2012.

Terrabon completed cons truction of a small demonstr ation scale facility for the conversion of MSW and other wast e materials into gasoline in 2010 and is planning to begin production at their first commercial scale fac ility in 2012. Terrabon utilizes a unique production process that can be used to produce gasoline, diesel , or jet fuel. Feedstock is first fermented into carboxylic acids by a variety of micro organisms. These carboxylic acids are then neutralized to form carboxylate salts that are dewatered, dried, and thermally converted to ke tones. Finally, the ketones are hydrogenated to form alcohols which ca n then be refined into gasoline, diesel, or jet fuel. While currently no pathway exists for the generation of RINs representing cellulosic gasoline in the RFS2 regulations, EPA is planning to initiate a rulemaking to create such a pathway in our regulations. This would allow for facilities such as Terrabon and others who may produce cellulosic gasoline in the future to regi ster and generate RINs under the RFS2 program (provided they meet the fuel registration, rene wable biomass, and other requirements of the program as well). EPA currently projects th e production of up to 0.7 million gallons (1.0 million ethanol equivalent gallons) of cellulosic ga soline in 2012 from Terrabon’s first commercial facility.

ZeaChem has begun construction on a small demonstration scale facility in Boardman, Oregon capable of producing 250,000 gallons of cellulosic ethanol per year. Their production process uses a combination of biochemical and thermochemical technologies to produce ethanolPage 33 of 184 and other renewable chemicals from cellulosic materi als. The feedstock is first fractionated into two separate streams containing cellulosic sugars and lignin. The cellulosic sugars are fermented into ethyl acetate using a naturally occurring acetogen, which can then be hydrogenated into ethanol. The hydrogen necessary for this pro cess is produced by gasifying the lignin stream from the cellulosic biomass. ZeaChem’s process is flexible and is capable of producing a wide range of renewable chemical and fuel molecules in addition to ethanol. ZeaChem plans to begin production of cellulosic ethanol from their fac ility in Boardman, Oreg on in late 2011, and EPA currently projects a potential production volum e of up to 0.25 million gallons of ethanol from this facility in 2012.

Another potential source of cellulosic biofue l in 2012 is a technology being developed by EdeniQ. EdeniQ is developing a suite of en zymes capable of breaking down cellulose into simple sugars that can then be fermented into ethanol. Rather than build their own production facilities EdeniQ plans to license their enzymes to existing corn ethanol facilities. Such licensing would be accompanied by the Cellunator, an advanced milling device they have developed to reduce the particle size of corn kernels to enable greater conversion of starch to ethanol as well as the conversion of cellulose to simple sugars. EdeniQ claims that their technology would allow corn ethanol facilities to increase ethanol produ ction by 1-2% by converting the cellulosic portion of the corn kernel into ethanol. They ar e also working to increase the effectiveness of their enzymes in order to enable ethanol productio n increases of 3-4% from the cellulose in the corn kernel in the future. EdeniQ plans to be gin commercial trials of their technology in the second half of 2011. This technology has the pot ential to be implement ed rapidly and produce significant amounts of cellulosic ethanol in 2012 as it requires relatively small capital additionsPage 34 of 184 to already existing corn ethanol facilities. While this technology is promising, there is currently no pathway in the RFS2 regulations for the ge neration of cellulosic biofuel RINs using the cellulosic portion of the corn kernel as a feed stock. Moreover, EdeniQ has not announced any agreements with corn ethanol producers to inst all this technology to enable the production of cellulosic ethanol. For these reasons, EPA ha s not included any cellulosic ethanol production from EdeniQ’s technology in our 2012 projections. We will continue to monitor their process in the coming months for signs of progress toward s commercialization of th eir technology and will consider adding production volumes from EdeniQ into our final projec tions if appropriate.

In addition to the facilities mentioned above, EPA is also aware of three companies planning to begin the production of cellulosic biofuels in early 2013. Coskata, Enerkem, and Poet are planning on completing construction on their first commercial scale cellulosic biofuel facilities in late 2012 or early 2013 and producing commercial vol umes of biofuels in 2013. While it is possible that construction of any of these facilities could be completed ahead of schedule and a small volume of fuel could be pr oduced in 2012, history in this industry suggests that this is unlikely. EPA has therefore not projected that any volume of cellulosic biofuel will be produced from these facilities in 2012. These f acilities, along with se veral other commercial cellulosic biofuel facilities pla nning to begin production in 2013, notably the first commercial scale facilities from Abengoa and Mascoma, indicate that the potential exists for the rapid expansion of production volumes in future years.

3. Imports of Cellulosic BiofuelPage 35 of 184 While domestically produced cellulosic biofuels are the most likely source of cellulosic biofuel available in the United States, producers and/or importers of cellulosic biofuel produced in other countries may also generate RINs and pa rticipate in the RFS2 program. While the RFS2 program does provide a financial incentive for companies to import cellulosic biofuels into the United States, the combination of local demand, financial incentives from other governments, and transportation costs for the cellulosic biof uel has resulted in no ce llulosic biofuel being imported to the United States thus far. EPA believes this situation is likely to continue in the near future. Additionally, the majority of internationally based cellulosic biofuel facilities that currently exist or plan to complete construc tion by the end of 2012 are small research and development or pilot facilities not designed for the commercial production of fuel.

Two notable exceptions, both located in Cana da, are Enerkem and Iogen. Enerkem has a currently existing commercial pr oduction facility in Westbury, Quebec and is expecting to complete construction on a sec ond facility in Edmonton, Alberta in late 2011. Iogen has a small demonstration facility in Ottawa and is currently exploring the possibility of building their first commercial facility near Prince Albert, Saskatchewan. The la rge expected production volumes and relatively small distance this fuel would have to be transported to reach the United States make these facilities the most likely candidates to import cellulosic biofuel into the United States. In conversations with EPA, however, bot h companies indicated that they had no current intentions of importing fuel from their Canadian production facilities into the United States. On September 1, 2010 the government of Canada finalized regulations requiring all gasoline sold in Canada to have a renewable conten t of 5% and all diesel fuel and heating oil to have a renewablePage 36 of 184 content of 2%. These regulations will further increase local demand for any cellulosic biofuel produced from these two facilities and decrease the likelihood of an y of this fuel being exported to the United States. For these reasons we ha ve not included any cellulosic biofuel production from foreign facilities in our projections of cellulosic biofuel availability in 2012.

4. Summary of Volume Projections

The information EPA has gathered on the potential cellulosic biofuel producers in 2012, described above, allows us to identify potential volumes that could be achieved by each facility in 2012. This information is summarized in Table II.B.4-1 below.Page 37 of 184Table II.B.4-1Cellulosic Biofuel 2012 Potentially Available VolumeCompany NameLocationFeedstockFuelCapacity(MGY)EarliestProduction2012 PotentiallyAvailable Volume(MG)EthanolEquivalentGallons (MG)DuPont DaniscoCellulosic EthanolVonore, TN Corn Stover Ethanol 0.25 Online 0.25 0.25FiberightaBlairstown, IA MSW Ethanol 6 Online 3.0 3.0Fulcrum Bioenergy McCarran, NV MSW Ethanol 10.5 Late 2012 0.5 0.5INEOS Bio Vero Beach, FL Ag Residue, MSW Ethanol 8 May 2012 3.0 3.0KiOR Houston, TX Ag Residue Gasoline, Diesel 0.2 Online 0.2 0.3KiOR Columbus, MS Pulp Wood Gasoline, Diesel 10 Mid 2012 4.0 6.4KL Energy Upton, WY Wood Waste Ethanol 1.5 Online 1.0 1.0Terrabon Port Arthur, TX MSW Gasoline 1.3 2012 0.7 1.0ZeaChem Boardman, OR Planted Trees Ethanol 0.25 2011 0.25 0.25Total 12.9 15.7aBased on company estimatePage 38 of 184 The potentially available volume of 12.9 milli on gallons of cellulosic biofuel, or 15.7 million ethanol equivalent gallons, represents the higher end of the range of cellulosic biofuel volumes that EPA believes at this time could reasonably be expect ed to be produced or imported and made available for use as transportation fuel, h eating oil, or jet fuel in 2012. It incorporates reductions from the annual production capacity of each facility based on when the facilities anticipate fuel production will begin and assumptions regarding a ramp up period to full production. Other factors such as the funding stat us, risks associated with new technologies, and the current status of project construction were considered for each facility.

For the lower end of the range, we be lieve that a volume of 3.55 million ethanolequivalent gallons could be jus tified based on currently available information. This volume is based on a consideration of only those facilities that are structurally complete at the time of this proposal and which have indicated that they anticipate commercial production of cellulosic biofuels by the end of 2011. The production facilities meeting these criteria include Dupont Danisco Cellulosic Ethanol, Fiberight (2 million ga llon per year first stage), KiOR (Houston, TX facility), and KL Energy. While there is still some uncertainty regarding the projected volumes from these facilities, by completing construction and anticipating fuel production by the end of 2011 there is less uncertainty associated with thes e facilities than for the others listed as potential cellulosic biofuel producers for 2012.

Therefore, in today's NPRM we are proposing a range of values, from 3.55 million ethanol equivalent gallons to 15.7 million ethanol equivalent gallons for the 2012 cellulosicPage 39 of 184 biofuel standard. The low end of the range repres ents a projection of higher confidence and less uncertainty, with greater emphasis placed on established/demonstrated production capacity. The high end of the range represents a projection of less confidence and hi gher uncertainty, with greater emphasis placed on productions plans. As time progresses and we are able to track whether or not the cellulosic biofuels producers are able to meet the construction and ramp up schedules they have presented, and as we consider public comme nts on this proposal and the EIA estimated 2012 volume of cellulosic bi ofuel production that they are required to provide to us by October 31 of this year, we will have a better idea of the appropriate volume of fuel that we can reasonably expect to be produced and made comm ercially available in 2012. Congress did not specify the degree of certainty that should be re flected in our projections of cellulosic biofuel volumes. We expect that the volume that we project in the final rule for 2012 will represent a reasonable balance of the degree of uncertainty or confidence in the projected production volume and the risk of unnecessarily reducing the app licable volumes set forth in the Act.

Although we are proposing a range of valu es from 3.55 to 15.7 million ethanol equivalent gallons based on information available at the time of this NPRM, we also request comment on alternative options for setting the 2012 cellulosic biof uel volume requirement at a higher level. It is possible that a cellulosic bi ofuel volume requirement which reduces less of the 500 mill gallon applicable volume from the statut e could spur additional near a nd longer-term cellulosic biofuel production capacity. We recognize that any meth od must take into account the uncertainty in estimating future production potentia l. Nevertheless, the purpose of setting a mandate is to stimulate more rapid increases in the rate of pr oduction than the cellulosic biofuel industry would likely experience in the absence of the manda te. We request comment on whether a higherPage 40 of 184 volume requirement for cellulosic biofuel than we are proposing today w ould provide additional stimulation of production volumes of cellulosic biofuel, and the basis for setting such a higher volume requirement.

C. Potential Limitations in 2012

In addition to production capacity, a variety of other factors have the potential to limit the amount of cellulosic biofuel that can be produced and used in the U.S. For instance, there may be limitations in the availability of qualifying cellulosic feedstocks at reasonable prices. Most of the cellulosic biofuel producers that we an ticipate will produce commercial volumes in 2012 have indicated that they will use some type of cellulosic waste, such as separated municipal solid waste, wastes from the forestry industry, and ag ricultural residues. Based on the analyses of cellulosic feedstock availability in the RFS2 final rule, we believe that there will be significantly more than enough sources of these feedstocks for 2012. For producers that intend to use dedicated energy crops, we do not believe that the amount of qualifying cropland for renewable fuel production under RFS2 will lim it production in 2012. We plan to continue to evaluate the availability of valid feedstocks in future years as the required volumes of cellulosic biofuel increase.

We anticipate that the relatively small incremental increase in total biofuel volumes in 2012 that would be attributed to cellulosic biofue ls can be accommodated by the fuel distribution system. The RFS2 final rule analysis concluded that biofuel distribution challenges as the RFS2 volume requirements ramp up could be overcome in a timely fashion. In the RFS2 final rulePage 41 of 184 analysis, we assumed that most cellulosic biof uel production facilities woul d be constructed in the nation’s heartland similar to corn ethanol production facilities. Based on more recent information, we now believe that cellulosic production facilities will be more geographically dispersed. This is the case for the specific cellu losic biofuels production fa cilities that we expect would produce fuel in 2012. The greater geograph ic dispersion would tend to lessen the distance to transport biofuels to petroleum terminals, thereby reducing the overall distribution burden. We believe that the cellulosic biofuel volum es that would be produced in 2012 could be accommodated by fuel retailers without nece ssitating the installati on of new refueling infrastructure such as that which would be needed for E85.

D. Advanced Biofuel and Total Renewable Fuel in 2012

Under CAA 211(o)(7)(D)(i), EPA has the disc retion to reduce the applicable volumes of advanced biofuel and tota l renewable fuel in the event that the projected volume of cellulosic biofuel production is deter mined to be below the applicable vol ume specified in the statute. As described in Section II.B above , we are indeed projecting th e volume of cellulosic biofuel production for 2012 at significantly below the statutory applicable volume of 500 million gallons. Because cellulosic biofuel is used to satisfy the cellulosic biofuel standard, the advanced biofuel standard, and the total renewable fuel standard, an y reductions in the applicable volume of cellulosic biofuel will also affect the means through which obligated parties comply with the advanced biofuel standa rd and the total renewable fuel standard. Therefore, we havePage 42 of 184 considered whether and to what degree to propose lowering the advan ced biofuel and total renewable fuel appli cable volumes for 2012.

If the required volume of cellulosic biofue l for a given year is less than the volume specified in the statute, it is important to ev aluate whether there woul d be sufficient volume of advanced biofuels to satisfy th e applicable volume of advanced biofuel volume set forth in the statute. Even with a reduced volume of cellulo sic biofuel, other advanced biofuels, such as biomass-based diesel, sugarcane ethanol, or ot her biofuels, may be available in sufficient volumes to make up for the shortfall in cellulosic bi ofuel. We believe that it would be consistent with the energy security and greenhouse gas reduc tion goals of EISA to not reduce the applicable volume of advanced biofuel set forth in the statut e if there are sufficient volumes of advanced biofuels available, even if those volumes do not include the amount of cellulosic biofuel that Congress may have desired. Our authority to lowe r the advanced biofuel and/or total renewable fuel applicable volumes is discretionary, and in general we believe that actions to lower these volumes should only be taken if insufficient volumes of qualifying biofuel can be made available, based on such circumstances as insufficient production capacity, insufficient feedstocks, competing markets, constrained infrastr ucture, or the like. As discussed below, we project that sufficient volumes of advanced biofuel can be made available in 2012 such that the 2.0 bill gallon advanced biofuel re quirement need not be reduced.

If we were to maintain the advanced biof uel, biomass-based dies el, and total renewable fuel volume requirements at the levels specified in the statute, while also lowering the cellulosic biofuel standard to 3.55 - 15.7 million ethanol -equivalent gallons, then 1,504 - 1,516 millionPage 43 of 184 gallons of the 2.0 billion gallon advanced biofue l mandate would be sa tisfied automatically through the satisfaction of the cellulosic and biom ass based diesel standards. An additional 484 - 496 million ethanol-equivalent gallons of additional advanced biof uels would be needed. See Table II.D-1.

Table II.D-1 Projected Fuel Mix If Only Cellulosic Biofuel Volume is Adjusted in 2012 (mill gallons) Ethanol-Equivalent Volume Physical Volume
Total renewable fuel Conventional renewable fuel a 15,200 13,200 14,536 - 14,701 13,200 Total advanced biofuel 2,000 1,336 - 1,501 Cellulosic biofuel Biomass-based diesel Other advanced biofuel b 3.55 - 15.7 1,500 484 - 496 3.45 - 12.9 1,000 323 - 496 c a Predominantly corn-starch ethanol b Rounded to nearest million gallons for simplicity c Physical volume is a range because other advan ced biofuel may be ethanol, biodiesel, or some combination of the two

The most likely sources of additional adva nced biofuel would be imported sugarcane ethanol and biomass-based diesel , though there may also be some volumes of other types of advanced biofuel available as disc ussed below. To determine if there are likely to be sufficient volumes of these biofuels to meet the need for 484 - 496 million gallons of other advanced biofuel, we first examined hi storical data on ethanol imports and projections from EIA and USDA for 2012. Brazilian imports have made up a sizeable portion of total ethanol imported into the U.S. in the past, and these volumes were predominantly produced from sugarcane. Ethanol imports averaged about 380 million gallons pe r year over the last five years, and reached an all-time high of 730 million gallons in 2006 6 . These historical im port volumes demonstrate

6 "Monthly U.S. Imports of Fuel Ethanol," EIA, released 3/30/2011Page 44 of 184 that Brazil has significant export potential unde r the appropriate economic circumstances. However, ethanol imports were significantly lower in 2010 than in previous years. This decline in imports may be related to the cessation of the duty drawback that became effective on October 1, 2008, or to changes in world sugar prices. 7 However, Brazil continues to be second worldwide in the production of ethanol, pr oducing a total of 6.9 bill gallons in 2009. 8 By establishing an increased U.S. demand for 484 - 496 million gallons of other advanced biofuel in 2012, we would be re-establishing an export mark et for Brazillian sugarcan e ethanol that could compete with the use of sugarcane to produce su gar, and thus it can once again be economical for Brazilian producers to export higher volumes of sugarcane ethanol to the U.S. Moreover, California's Low Carbon Fuel Standa rd went into effect in 2010, a nd may result in some refiners importing additional volumes of sugarcane etha nol from Brazil into California in 2012. These same volumes could count towards th e federal RFS2 program as well.

Future projections from other sources also suggest that a large portion of the 484 - 496 million gallons of advanced biofuel needed coul d be supplied by imported sugarcane ethanol. For instance, in the Early Release of its Annual Energy Outlook 2011, EIA projects ethanol imports of approximately 400 million gallons for 2012 9 . Similarly, the university-based Food and Agricultural Policy Research Institute (FAPRI) released its 2010 U.S. and World Agricultural Outlook report in which it proj ects 2012 ethanol imports of 317 million gallons. 10 The volumes of imported ethanol projected by both of these sources is very likely to be

7 Lundell, Drake, “Brazilian Ethanol Export Surge to End; U.S. Customs Loophole Closed Oct. 1,” Ethanol and Biodiesel News, Issue 45, November 4, 2008. 8 Portal Brasil, Energy Matrix for Ethanol, http://www.brasil.gov.br/sobre/economy/energymatrix/ethanol/br_model1?set_language=en 9 Table 11 of AEO2011 Early Release, Report Number DOE/EIA-0383ER(2011). http://www.eia.doe.gov/forecasts/aeo/tables_ref.cfm 10 Table "Ethanol trade", World Biofuels, FAPRI 2010 U.S. and World Agricultural Outlook. http://www.fapri.iastate.edu/outlook/2010/Page 45 of 184 sugarcane ethanol, since this is by far the predom inant form of imported et hanol to date and is expected to continue to be so for the foreseeable future.

We also examined the potential for excess bi odiesel to help meet the need for 484 - 496 million gallons of advanced biofuel. The applicable volume of biomass based diesel established in the statute for 2012 is 1.0 billion gallons (which corresponds to 1500 ethanol-equivalent gallons). As discussed more fully in Section II .E below, we believe that the biodiesel industry has the potential for producing volumes above 1.0 billion gallons if demand for such volume exists, potentially up to an add itional several hundred million gallons.

Another potential source of advanced biofuels is electri city generated from renewable biomass that is used as a transportation fuel. EIA data indicates that in 2009, the most recent year for which data is available, 35.6 million me gawatt-hours of electricity was generated from wood and wood derived fuels, and an additi onal 18.4 million megawatt- hours was generated from other biomass in the United States 11 . If all of this electricity were used as a transportation fuel it would represent nearly 2.4 billion ethanol e quivalent gallons of adva nced biofuel. While not all the feedstocks used to generate the electricity included in these totals would meet the RFS2’s renewable biomass definition this rema ins a very large potential source of advanced biofuel RINs.

In addition to verifying that the feedstocks used to generate renewable electricity meet the renewable biomass definition producers woul d also be required to document that the

11 Table ES1 of Electric Power Industry 2009: Year in Review. Available online: http://www.eia.doe.gov/cneaf/electricity/epa/epayir.pdfPage 46 of 184 electricity they produce is used as a transportation fu el in order to be eligib le to generate RINs. Until recently there were very few vehicles capable of using electricity as a transportation fuel. Expected increases in the number of vehicles with this capability, such as electric vehicles and plug in hybrids, has the potential to dramatically increase the degree to which electricity is able to be used as a transportation fuel. Verifying th at the renewable electricity produced is used as a transportation fuel would still remain a challenge, however the potential for capitalizing on the RIN value, without the necessity of making major changes in the areas of fuel production, distribution, or end use, may be a large enough incentive to overcome this challenge. While the many uncertainties associated with the genera tion of advanced biofue l RINs from renewable electricity prevent EPA from making a quantitative projection for 2012, such RINs may nevertheless play a role in meeting the advanced biofuel standard.

Finally, there are also other potential sources of advanced biofuels. For instance, several companies are making progress on opening advanced biofuel production facilities as early as 2012. Gevo purchased a dry mill corn ethanol plan t in Minnesota and is in the process of converting it to produce up to 10 million gallons of biobutanol per year. Solazyme produced over 150,000 gallons of algal oil in 2010-2011 that was then converted to jet fuel by UOP and is planning for increased production in 2012. LS9 purc hased a fermentation facility in Florida that will enable them to produce 50,000 to 100,000 gallons of diesel fuel per year and plan to have this facility full operational by 2012. Several other companies are also planning on producing advanced biofuels using a variety of feedstocks , including sugars, sweet sorghum, waste cooking oil or restaurant grease, algal oils, and many ot hers that have the potential to achieve commercial production by the end of 2012. Insofar as such fu els are registered under 40 CFR Part 79 andPage 47 of 184 meet all the requirements for RIN generation unde r the RFS program, they could contribute to compliance with the advanced biofuels standard in 2012.

By adding up the potential volumes of impor ted sugarcane ethanol, excess biodiesel, and other sources of advanced biofuel, there are likel y to be sufficient volumes of advanced biofuels to meet the need for 484 - 496 million gallons. As a result, we do not believe that the advanced biofuel standard need be lowere d below the 2.0 billion gallon level specified in the Act. Thus, we are not proposing to reduce the applicable vol ume of advanced biofuel for 2012. In addition, since we are not proposing to lower the advanced biofuel standard for 2012, we do not believe that there is a need to lower the total renewable fuel standard. Nevertheless, since there is some uncertainty in both the availability of advanced biofuels in 2012 and the market conditions which would support their availability, we request comm ent on whether the advan ced biofuel and total renewable fuel standards should be lowered, and the basis for such a reduction in the applicable volumes from the statute.

E. Biomass-Based Diesel in 2012

As described more fully in Section II.D a bove, we must determine whether the required volumes of advanced biofuel a nd/or total renewable fuel shoul d be reduced if we reduce the required volume of cellulosic biofuel. The amount of biomass-based diesel that we project will be available directly affected our proposed cons ideration for this NPRM of adjustments to the volumetric requirements fo r advanced biofuel and total renewable fuel.Page 48 of 184 To evaluate whether the applicable volume of 1.0 bill gallons for biomass-based diesel is achievable in 2012, and whether even greater volum es could be produced, we examined recent production rates, production capacity of the indus try, and projections for future production. Although there are a variety of potential fuel ty pes that can qualify as biomass-based diesel, biodiesel is by far the predominant type. T hus, our assessment focused primarily on biodiesel, though we also investigated poten tial volumes of renewable diesel.

According to the Energy Information Administration, biodiesel production in 2010 reached 311 mill gallons 12 . However, we believe that this value underestimates the volume of biomass-based diesel actually produced in 2010 sin ce it is based primarily on feedstocks used in the production of biodiesel. Based on informatio n from the EPA-Moderated Transaction System (EMTS) and RIN generation reports submitted to EPA from producers, we estimate that the volume of biomass-based diesel produced in 2010 was about 380 mill gallons. While this is higher than the 345 mill gallons that we projected would be needed for compliance with the 2010 biomass-based diesel standard 13 , there were also exports of biodi esel that would have reduced the availability of RINs for compliance purposes. To the degree that the volume of biomass-based diesel fell short of the 345 mill gallons that we estimated would be needed, obligated parties would have needed to carry a deficit into 2011.

However, many of the activities of the bi odiesel industry in 2010 were due to unique circumstances that may not apply in 2012. It is likely that a contributing factor to the lower

12 Monthly Energy Review, May 2011. http://www.eia.doe.gov/emeu/mer/pdf/pages/sec10_8.pdf 13 See question 6.7 in EPA's "Questions and Answers on Changes to the Renewable Fuel Standard Program (RFS2)", http://www.epa.gov/otaq/fuels/renewablefuels/compliancehelp/rfs2-aq.htm#6Page 49 of 184 production volumes in 2010 was the expiration of th e biodiesel tax credit at the end of 2009, and the uncertainty throughout 2010 regarding whether and when it might be reinstated. This situation may have led to hesita tion on the part of obligated parties for establishing binding contracts for purchases of biodiesel.

Historical production of biodi esel has varied significantly depending on market demand as shown in Figure II.E-1 below.Page 50 of 184 Figure II.E-1 Historical Domestic Production of Biodiesel

Source: EIA Annual Energy Outlook 2011 Early Release 0 100 200 300 400 500 600 700 800



### 2006 2007 2008 2009 2010Mill gallonsPage 51 of 184 The fact that the U.S. biodiesel industry ha s produced higher volumes when demand for it existed suggests that the industry has the capab ility to produce greater volumes than it did in 2010 under the appropriate circumstances. For instance, information from the EPA-Moderated Transaction System (EMTS) indicates that m onthly production volumes of biodiesel have increased steadily in the first few months of 2011, reaching 74 mill gallons by April 14 . This trend demonstrates that the industry is res ponding to the higher demand created by the 800 mill gal biomass-based diesel volume requi rement under the RFS program in 2011.

The biodiesel industry's production potential supports the view that it can more than satisfy the applicable volume of biomass based diesel specified in the statute for 2012. As of January, 2011, the aggregate production capacity of bi odiesel plants in the U.S. was estimated at 2.8 billion gallons per year acro ss approximately 170 facilities. 15 Of this aggregate production capacity, at least 1.8 billion gallons of producti on capacity has been registered under the RFS2
program. 16 Although some facilities are currently id le, and ramping up pr oduction will require some time and potentially some reinvestment, based on feedback from industry we nevertheless believe that it can occur in time to meet a production goal of 1.0 billion gallons in 2012.

Projections of production for 2012 strongly su ggest that 1.0 bill gall ons of biomass-based diesel is achievable. For instance, the U.S. Department of Agriculture projects that over 400 mill gallons of biodiesel will be produced from soyb ean oil in 2012, and adds that "Although some

14 2011 RIN Generation and Renewable Fuel Volume Production, http://www.epa.gov/otaq/fuels/renewablefuels/compliancehelp/rfsdata.htm 15 Figures taken from National Biodiesel Board's Member Plant List as of January 27, 2011. http://biodiesel.org/buyingbiodiesel/plants/showall.aspx 16 Comments from National Biodiesel Board on the July 20, 2010 NPRM proposing the RFS standards for 2011. See docket EPA-HQ-OAR-2010-0133Page 52 of 184 other first-use vegetable oils are also used to produce biodiesel, most of the remaining biodiesel production needed to reach the 1-billion-gallon ma ndate of the 2007 Energy Act uses animal fats or recycled vegetable oil as the feedstock." 17 This projection is further supported by the Agricultural Marketing Resource Center at Iowa State University, which projects that soy-oil biodiesel production may reach as high as 470 mill gallons and that non-soy biodiesel may reach as high as 460 mill gallons. 18 Both of these sources project more growth in non-soy oil feedstock volumes than soy oil. Finally, EIA projects th at the total volume of biodiesel in 2012 would be about 840 mill gallons. 19 While all of these projections s uggest that volumes of biodiesel may fall short of 1.0 bill gallons, we be lieve that sufficient additiona l volumes of renewable diesel can also be available to meet the 1.0 bill gal requ irement for biomass-based diesel. For instance, Dynamic Fuels has constructed one plant in Geismar, Louisiana that started production of renewable diesel in November, 2010. 20 In the final RFS2 rule, we projected that annual renewable diesel production could reach 150 mill ga llons based on feedstock availability. Since renewable diesel can also be produced at existing refineries with little or no modification to processing equipment, we believe that 150 mill gallons of renewable diesel could be produced in 2012. Thus, we currently believe that the total production volume of both biodiesel and renewable diesel can reach 1.0 bill gal in 2012.

We also believe that there will be sufficient sources of qualifying renewable biomass to more than meet the needs of th e biodiesel industry in 2012. The la rgest sources of feedstock for

17 USDA Agricultural Projections to 2020, Long-Term Projections Report OCE-2011-1, February 2011. See Table 24. Assumes 7.68 lb/gal. 18 Soybean Oil and Biodiesel Usage Projections and Balance Sheet, updated 2/18/2011. http://www.extension.iastate.edu/agdm/crops/outlook/soybeanbalancesheet.pdf. Values cited are for the "High" case. 19 Short-Term Energy Outlook, February 2011. Table 8. 20 Project status updates are available via the Syntroleum website, http://dynamicfuelsllc.com/wp-news/Page 53 of 184 biodiesel in 2012 are expected to be soy oil, canol a oil, rendered fats, and potentially some corn oil extracted during production of fuel ethanol, as this technology continues to proliferate. Moreover, information we received from a large rendering company suggests that there will be adequate fats and greases feedstocks to supply biofuels production as we ll as other historical

uses. 21

Based on our review of the production potential of the biodiesel industry, and projections from several sources, and our assessment of ava ilable feedstocks, we believe that the 1.0 billion gallons needed to satisfy the applicable volume of biomass-based diesel sp ecified in the statute can be produced in 2012. Therefore, we are not proposing to lower the biomass-based diesel standard of 1.0 billion gallon that is specified in the Act. Moreover, based on production capacity and availability of feedstocks, we believe that volumes of biomass-based diesel in excess of 1.0 bill gallons could be made av ailable given sufficie nt market demand.

21 See Federal Register v.74 n.99 p.24903. Comments are available in docket EPA-HQ-OAR-2005-0161.Page 54 of 184 III. Proposed Percentage Standards for 2012

A. Background

The renewable fuel standards are expressed as a volume percentage, and are used by each refiner, blender or importer to determine their renewable volume ob ligations (RVO). Since there are four separate standards under the RFS2 program, there are likewise four separate RVOs applicable to each obligated party. Each standard applies to the sum of all gasoline and diesel produced or imported. The applicable percentage standards are set so that if each regulated party meets the percentages, then the amount of renewable fuel , cellulosic biofuel, bi omass-based diesel, and advanced biofuel used will meet the vol umes required on a nationwide basis.

As discussed in Section II.B.4, we are pr oposing a required volume of cellulosic biofuel for 2012 in the range of 3.45 – 12.9 million ga llons (3.55 – 15.7 million ethanol equivalent gallons). The single volume we select for the final rule will be used as the basis for setting the percentage standard for cellulosic biofuel for 2012. We are also proposing that the advanced biofuel and total renewable fuel volumes would not be reduced below the applicable volumes specified in the statute. The proposed 2012 vol umes used to determine the four percentage standards are shown in Table III.A-1.Page 55 of 184 Table III.A-1 Proposed Volumes for 2012 Actual Volume Ethanol Equivalent Volume Cellulosic biofuel 3.45-12.9 mill gal 3.55-15.7 mill gal Biomass-based diesel 1.0 bill gal 1.5 bill gal Advanced biofuel 2.0 bill gal 2.0 bill gal Renewable fuel 15.2 bill gal 15.2 bill gal

The formulas used in deriving the annual re newable fuel standards are based in part on estimates of the volumes of gasoline and diesel fuel , for both highway and nonroad uses, that will be used in the year in which the standa rds will apply. Producers of other transportation fuels, such as natural gas, propane, and electri city from fossil fuels, are not subject to the standards, and volumes of such fuels are not used in calculating the annual standards.. Since the standards apply to producers and importers of gasoline and diesel , these are the transportation fuels used to set the standards, and then again to determine the annual volume obligations of an individual gasoline or diesel producer or importer.

B. Calculation of Standards

1. How Are the Standards Calculated?

The following formulas are used to calculate the four percentage standards applicable to producers and importers of gaso line and diesel (see §80.1405):Page 56 of 184 i i i i i i i i i i 

### DE RDS DS RD D GE RGS GS RG G

− − +

− +

− − +

− × = ) ( ) ( ) ( ) ( RFV % 100 Std i CB, i CB,

i i i i i i i i i i 

### DE RDS DS RD D GE RGS GS RG G

− − +

− +

− − +

− × × = ) ( ) ( ) ( ) ( 5

. 1 RFV % 100 Std i BBD, i BBD,

i i i i i i i i i i 

### DE RDS DS RD D GE RGS GS RG G

− − +

− +

− − +

− × = ) ( ) ( ) ( ) ( RFV % 100 Std i AB, i AB,

i i i i i i i i i i 

### DE RDS DS RD D GE RGS GS RG G

− − +

− +

− − +

− × = ) ( ) ( ) ( ) ( RFV % 100 Std i RF, i RF,

Where

Std CB,i = The cellulosic biofuel standard for year i, in percent.

Std BBD,i = The biomass-based diesel st andard (ethanol-equiva lent basis) for year i, in percent.

Std AB,i = The advanced biofuel standard for year i, in percent.

Std RF,i = The renewable fuel standard for year i, in percent.

RFV CB,i = Annual volume of cellulosic biofuel requi red by section 211(o) of the Clean Air Act for year i, in gallons.Page 57 of 184 RFV BBD,i = Annual volume of biomass-based diesel required by section 211(o) of the Clean Air Act for year i, in gallons.

RFV AB,i = Annual volume of advanced biofuel requi red by section 211(o) of the Clean Air Act for year i, in gallons.

RFV RF,i = Annual volume of renewable fuel require d by section 211(o) of the Clean Air Act for year i, in gallons.

G i = Amount of gasoline projected to be used in the 48 contiguous states and Hawaii, in year i, in gallons.

D i = Amount of diesel projected to be used in the 48 contiguous states and Hawaii, in year i, in gallons.

RG i = Amount of renewable fuel blended into ga soline that is projected to be consumed in the 48 contiguous states and Hawaii, in year i, in gallons.

RD i = Amount of renewable fuel ble nded into diesel that is projected to be consumed in the 48 contiguous states and Hawaii, in year i, in gallons.

GS i = Amount of gasoline projected to be used in Alaska or a U.S. territory in year i if the state or territory opts-in, in gallons.Page 58 of 184 RGS i = Amount of renewable fuel blended into gasoline that is projected to be consumed in Alaska or a U.S. territory in year i if the state or territory opts-in, in gallons.

DS i = Amount of diesel projected to be used in Alaska or a U.S. territory in year i if the state or territory opts-in, in gallons.

RDS i = Amount of renewable fuel blended into di esel that is projected to be consumed in Alaska or a U.S. territory in year i if the state or territory opts-in, in gallons.

GE i = The amount of gasoline projected to be produced by exempt small refineries and small refiners in year i, in gallons, in any year they are exempt per §§80.1441 and 80.1442, respectively. For 2012, this value is 3.27 bill gal. See further discussion in Section III.B.2 below.

DE i = The amount of diesel projected to be produced by exempt small refineries and small refiners in year i, in gallons, in any year they are exempt per §§80.1441 and 80.1442, respectively. For 2012, this value is 1.23 bill gal. See further discussion in Section III.B.2 below.

The four separate renewable fuel standa rds for 2012 are based on the 49-state gasoline and diesel consumption volumes pr ojected by EIA. The Act requires EPA to base the standards on an EIA estimate of the amount of gasoline and diesel that will be sold or introduced intoPage 59 of 184 commerce for that year. The projected volume of gasoline us ed to calculate the final 2012 percentage standards will be provided directly by EIA. For the purposes of this proposal, we have used the April 2011 issue of STEO for th e gasoline projection. Th e projected volume of transportation diesel used to calculate the final 2012 percentage standards will be provided by EIA. For the purposes of this proposal, we ha ve used the Early Release version of AEO2011. Gasoline and diesel volumes are adjusted to account for renewable fuel contained in the EIA projections. The projected volumes of ethanol and biodiesel used to calculate the final percentage standards will be provided by EIA; for 2011, the final values were based on EIA's Short-Term Energy Outlook (STEO). For the purpos es of this proposal, we have used the April 2011 values for ethanol and biodiesel provided in the STEO. Although EIA will be providing fuel consumption projections fo r the final rule, using the most recent available EIA data for purposes of this proposal allows us to provide the affected industries w ith a reasonable estimate of the standards for planning purposes.

2. Small Refineries and Small Refiners

In CAA section 211(o)(9), enacted as part of the Energy Policy Act of 2005, Congress provided a temporary exemption to small refineries (thos e refineries with a crude throughput of no more than 75,000 barrels of crude per day) through December 31, 2010. In RFS1, wePage 60 of 184 exercised our discretion under section 211(o)(3)(B ) and extended this temporary exemption to the few remaining small refiners that met the Small Business Administration’s (SBA) definition of a small business (1,500 employees or less comp any-wide) but did not m eet the statutory small refinery definition as noted above. Because EISA did not alter the small refinery exemption in any way, the RFS2 program regulations exempt ed gasoline and diesel produced by small refineries and small refiners in 2010 from the re newable fuels standard (unless the exemption was waived), see 40 CFR §80.1141.

Under the RFS program, Congress provided two ways that small refineries can receive a temporary extension of the exemption beyond 20 10. One is based on the results of a study conducted by the Department of Energy (DOE) to determine if small refineries would face a disproportionate economic hard ship under the RFS program. The other is based on EPA determination of disproportiona te economic hardship on a case-by-case basis in response to refiner petitions.

In January 2009, DOE issued a study which did not find that small refineries would face a disproportionate economic ha rdship under the RFS program. 22 The conclusions were based inpart on the expected robust availability of RINs and EPA’s ability to grant relief on a case-bycase basis. As a result, beginning in 2011 small refiners and small refine ries were required to participate in the RFS program as obligated pa rties, and there was no small refiner/refinery volume adjustment to the 2011 standard as there was for the 2010 standard.

22 DOE report “EPACT 2005 Section 1501 Small Refineries Exemption Study”, (January, 2009).Page 61 of 184 Following the release of DOE's 2009 small re finery study, Congress directed DOE to complete a reassessment and issue a revised report. DOE recently re-evaluated the impacts of the RFS program on small entities and concluded that some small refineries would suffer a disproportionate hardship if require d to participate in the program 23 . As a result, these refineries will be exempt from being obligated parties for a minimum of two additional years, 2011 and
2012. 24 The proposed 2012 standards reflect the exem ption of these refineries. In addition, and separate from the DOE determination, EPA ma y extend the exemption for individual small refineries on a case-by-case basis if they de monstrate disproportionate economic hardship. A few refineries have satisfactorily made this de monstration, and EPA has acted on their requests. The gasoline and diesel volumes of those refineries have been a ppropriately accounted for in the development of the proposed sta ndards. If additional individual refinery requests for exemptions are approved following the release of this NPRM, the final standards will be adjusted to account for those exempted volumes of ga soline and diesel. However, an y requests for exemptions that are approved after the release of the final 2012 R FS standards will not affe ct the 2012 standards. As stated in the final rule establishing th e 2011 standards, “EPA believes the Act is best interpreted to require issuance of a single annual standard in November that is applicable in the following calendar year, thereby providing adva nce notice and certainty to obligated parties regarding their regulatory requirements. Periodi c revisions to the standards to reflect waivers issued to small refineries or refiners would be inconsistent with the statutory text, and would introduce an undesirable level of uncertainty for obligated parties.” Thus, after the 2012 standards are finalized, any additional exemptions issued will not affect those standards.

23 "Small Refinery Exemption Study: An Investigation into Disproportionate Economic Hardship," U.S. Department of Energy, March 2011. 24 Since the standards are applied on an annual basis, the ex emptions are likewise on an annual basis even though the determination of which refineries would receive an extension to their exemption did not occur until after January 1, 2011.Page 62 of 184 3. Proposed Standards

As finalized in the March 26, 2010 RFS2 rule, the standards are expressed in terms of energy-equivalent gallons of renewable fuel, with the cellulosic biofuel, advanced biofuel, and total renewable fuel standard s based on ethanol equivalence and the biomass-based diesel standard based on biodiesel equivalence. Ho wever, all RIN generati on is based on ethanolequivalence. More specifically, the RFS2 re gulations provide that production or import of a gallon of biodiesel will lead to the generation of 1.5 RINs. In order to ensure that demand for 1.0 billion physical gallons of biomass-based diesel will be created in 2012, the calculation of the biomass-based diesel standard provides that the required volume be multiplied by 1.5. The net result is a biomass-based diesel gallon being worth 1.0 gallons toward the biomass-based diesel standard, but worth 1.5 gallons toward the other standards. 25

The levels of the percentage standards woul d be reduced if Alaska or a U.S. territory chooses to participate in the RFS2 program, as gasoline and diesel produced in or imported into that state or territory would then be subject to th e standard. Neither Alaska nor any U.S. territory has chosen to participate in the RFS2 program at this time, and thus the value of the related terms in the calculation of the standards is zero.

Note that the terms for proj ected volumes of gasoline and diesel use include gasoline and diesel that has been blended with renewable fuel. Because the gaso line and diesel volumes estimated by EIA include renewable fuel use, we must subtract the total renewable fuel volume

25 75 FR 14716, March 26, 2010.Page 63 of 184 from the total gasoline and diesel volume to get total non-renewable gasoline and diesel volumes. The values of the variables desc ribed above are shown in Table III.B.3-1. 26 Terms not included in this table have a value of zero.

Table III.B.3-1 Values for Terms in Calculation of the Standards (bill gal) Term Value RFV CB , 2012 0.00355- 0.0157 RFV BBD , 2012 1.0 RFV AB , 2012 2.0 RFV RF , 2012 15.20 G 2012 139.98 D 2012 44.47 RG 2012 14.17 RD 2012 0.83

Using the volumes shown in Table III.B.3-1, we have calculated the proposed percentage standards for 2012 as shown in Table III.B.3-2.

Table III.B.3-2 Proposed Percentage Standards for 2012 Cellulosic biofuel 0.002% to 0.010% Biomass-based diesel 0.91% Advanced biofuel 1.21% Renewable fuel 9.21%

26 To determine the 49-state values for gasoline and diesel, the amounts of these fuels used in Alaska is subtracted from the totals provided by DOE. The Alaska fractions are determined from the most recent (2009) EIA State Energy Data, Transportation Sector Energy Consumption Es timates. The gasoline and transportation distillate fuel oil fractions are approximately 0.2% and 0.8%, respectively. Ethanol use in Alaska is estimated at 8.4% of its gasoline consumption (based on the same State data), and biodiesel use is assumed to be zero.Page 64 of 184 IV. Biomass-Based Diesel Volume for 2013

In today's action we are proposing an appli cable volume for biomass-based diesel for 2013, based on the statutory requirement to establ ish the applicable volume of biomass-based diesel for years after 2012 no later than 14 months before the first year for which the applicable volume will apply. To do this, we have reviewed RFS program implementation to date and analyzed a number of factors specified in the statute as part of this effort. We have investigated what the demand for biomass-based diesel is likel y to be in 2013 taking into consideration the applicable advanced biofuel volum e specified in the statute, th e analyses we conducted in the RFS2 final rulemaking, and a considerati on of biodiesel production, consumption, and infrastructure issues. In these investigations, biodiesel was the primary focus since it is expected to be the predominant type of biomass-based diesel through at least the next few years. However, renewable diesel may also play a role in meeting the biomass-based diesel standard. When appropriate, we have discussed renewable diesel separately from biodiesel.

Note that, in proposing the 2013 applicable vol ume of biomass-based diesel, we are not at this time proposing the percentage standards th at would apply to obligated parties in 2013. Instead, the percentage standards will be determined after projections of gasoline and diesel volume are provided by the Energy Informati on Administration (EIA) in the fall of 2012, and will be announced by November 30, 2012. Moreover, in today's proposal we are not addressing potential exemptions for small refi neries and/or small refiners in 2013, since such exemptions are only relevant in the context of specifying the percentage standards and their applicability.Page 65 of 184 Finally, we are not proposing any applicable vol umes of biomass-based diesel for 2014 or later
years.

A. Statutory Requirements

Section 211(o)(2)(B)(i) of the Clean Air Act specifies the applicable volumes of renewable fuel on which the annual percentage st andards must be based, unless the applicable volumes are waived or adjusted by EPA in accordance with specific authority and directives specified in the statute 27 . Applicable volumes are provided in the statute for years through 2022 for cellulosic biofuel, advanced biofuel, and to tal renewable fuel. For biomass-based diesel, applicable volumes are provided through 2012. For ye ars after those specified in the statute (i.e. 2013+ for biomass-based diesel and 2023+ for all others), EPA is required to determine the applicable volume, in coordination with the Secretary of Energy and the Secretary of Agriculture, based on a review of the implement ation of the program during calendar years for which the statute specifies the applicable volumes, and an analysis of the following:

• The impact of the production and use of re newable fuels on the environment, including on air quality, climate change, conversion of wetlands, ecosystems, wildlife habitat, water quality, and water supply;

• The impact of renewable fuels on the energy security of the United States;

27 For example, EPA may waive a given standard in whole or in part following the provisions at 211(o)(7).Page 66 of 184 • The expected annual rate of future comme rcial production of renewable fuels, including advanced biofuels in each category (cellulosic biofuel and biomass-based diesel);

• The impact of renewable fuels on the infras tructure of the United States, including deliverability of materials, goods, and produc ts other than renewable fuel, and the sufficiency of infrastructure to deliver and use renewable fuel;

• The impact of the use of renewable fuels on th e cost to consumers of transportation fuel and on the cost to transport goods; and

• The impact of the use of renewable fuels on other factors, including job creation, the price and supply of agricultural commoditie s, rural economic development, and food prices.

While EPA is given the authority to determine the appropriate volume of renewable fuel for those years that are not specified in the statut e based on a review of program implementation and analysis of the factors listed above, the statut e also specifies that th e applicable volume of biomass-based diesel cannot be less than the applicable volume for calendar year 2012, which is 1.0 bill gallons.

It is useful to note that the statutory provisions described above are silent in two important areas. First, the statut e does not provide numerical criteri a or thresholds that must be attained in the determination of applicable volumes (other than specifying a minimum volume ofPage 67 of 184 1.0 bill gal), nor does it describe any overarching goals such as maximizing GHG or energy security benefits or minimizing cost. The EPA, in coordination with DOE and USDA, is thus effectively charged with making a determination of the applicable volumes based on a judgment of their reasonableness in the context of a review of program implementation and analysis of the factors described above. Second, the statute does not provide aut hority to raise the applicable volumes of advanced biofuel or to tal renewable fuel above those sp ecified in the statute for years up to and including 2022. Thus, any increase in the biomass-based dies el volume requirement above that specified for 2012 would not have any impact on the advanced biofuel or total renewable fuel volume requireme nts. Rather, increasing the biomass-based diesel volume requirement above 1.0 bill gallons would likely result in a change in the makeup of biofuels used to meet the advanced biofuel and the total rene wable fuel standards, but would not change the total required volumes of those fuels (i n terms of ethanol-equivalent gallons).

Finally, the statute also specifies the timeframe within which these volumes must be promulgated: the rules establishing the applicab le volumes must be finalized no later than 14 months before the first year for which such applicable volume will apply. For the biomass-based diesel volume that would apply beginning on January 1, 2013, then, we must finalize the applicable volume by November 1, 2011.

B. Factors Considered in Assessing 2013 Biomass-Based Diesel Volumes

As described in Section IV.A, we are requi red to review the implementation of the RFS program for years prior to 2013, and to use inform ation from this review in determining thePage 68 of 184 applicable volume of biomass-ba sed diesel for 2013. However, given the short history of the RFS program, we believe this review is of limited value. Prior to the beginning of the RFS2 program on July 1, 2010, the RFS1 program had no volume requirement specific to biomassbased diesel. Although RINs were generated for biodiesel under the RFS1 program and those RINs were available for use in satisfying obligated parties' RFS1 total re newable fuel Renewable Volume Obligation (RVO), we do not believe that the RFS1 program contributed significantly to producers’ production decisions. Rather, biodies el production was driven by market demand apart from the RFS program requirements coupled with a tax credit for biodiesel blends. We believe that little can be discerne d from the RFS1 history about the operation of the biodiesel industry under a future RFS2 volume mandate.

In the short time since the RFS2 program we nt into effect, biodi esel production volumes have not increased substantially a bove historical levels due most likely to factors such as the availability of carryover RINs from 2008 and 2009 and the expiration of the biodiesel tax credit (which was reinstituted at the end of 2010). Dome stic biodiesel consumption varied little in the 2008 - 2010 timeframe, averaging about 330 mill gallons each year.

Given the increases in the bi omass-based diesel volumes that are required in the statute for 2011 and 2012, we expect production and consum ption volumes of biodiesel to increase substantially above these recent historic levels. A review of the RFS program during 2011 and 2012 will, therefore, provide more relevant in formation regarding imple mentation of the RFS program for purposes of helping us to evaluate how the industry, as well as feedstock supplies and infrastructure, can respond to potential re quirements in 2014 and beyond. For the purposesPage 69 of 184 of proposing the 2013 biomass-base d diesel applicable volume in today's NPRM, however, this information is not available.

With the limited information available on the current and historical operation of the RFS program, we believe it would be prudent for 2013 to consider only moderate increases above the statutory minimum of 1.0 bill gallons. One possibl e benchmark is provided by the increments and growth pattern of those increments th at Congress established for the years 2009 – 2012, shown in Table IV.B-1.

Table IV.B-1 Incremental Increases in Biomass-Based Diesel in the Statute (bill gal) Applicable volume of biomass-based diesel Increment from previous year 2009 2010 2011 2012 0.5 0.65 0.80 1.0 n/a 0.15 0.15 0.20

These increments provide a precedent for evaluating a reasonable mandatory minimum growth pattern for 2013. The increments increased in ma gnitude over the four-year period specified in the statute, increasing from 0.15 bill gal to 0.20 bill ga l. If this trend were to continue, the 2013 volume could be more than 0.20 bill gal higher th an the 2012 volume. Thus our intention is to consider an incremental increase in the appli cable volume of biomass- based diesel between 2012 and 2013 that is not a dramatic change fro m the trend in increments shown above.

In the final rulemaking establishing the RFS2 program, we developed renewable fuel volume scenarios for all years between 2010 a nd 2022. For 2013, we estimated a biomass-basedPage 70 of 184 diesel volume of 1.28 bill gallons. This volum e was based primarily on a projection of the qualifying feedstocks that could be available. Ou r analyses of feedstock availability in the RFS2 final rule concluded that the 2013 minimum biom ass-based diesel volume of 1.0 bill gallons could be met and, indeed, that 1.28 billion gallons could be reasonably produced. 28 The value of 1.28 bill gallons assumed for 2013 in the RFS2 final rule appears to roughly follow the pattern in incremental growth shown in Table IV.B-1 above. Moreover, this biom ass-based diesel volume has already been partially evaluated in the RFS2 rule. Therefore, EPA decided to evaluate the appropriateness of proposing an applicable volume for 2013 of 1.28 bill gallons. To this end, we considered whether 1.28 bill gal of biomass-based diesel was reasonable given likely market demand, availability of feedstoc ks, production capacity, limitati ons related to storage and consumption, infrastructure, and the impacts of bi omass-based diesel in a variety of areas as required under the statute. These impacts are discussed in the subsequent Section IV.C.

1. Demand for Biomass-Based Diesel

The demand for biomass-based diesel in 2013 will be a function of not only the biomassbased diesel standard, but also the advanced bi ofuel standard, since the standards under the RFS2 program are nested. That is, every RIN that is valid for meeting the biomass-based diesel standard is also valid for meeting the advanced biofuel standard. Moreover, there are currently only a small number of biofuels that are likely to be available for meetin g the advanced biofuel standard. In addition to bioma ss-based diesel, these would include any RINs used to meet the cellulosic biofuel standar d, coprocessed renewable diesel, and sugarcane ethanol. To the degree

28 Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis. EPA-420-R-10-006, February 2010. See Table 1.2-3.Page 71 of 184 that there are limits in these other advanced biofuels, additional biomass-based diesel may be needed to make up any shortfall.

Since the advanced biofuel standard is an important factor in determining the demand for biomass-based diesel in 2013, we considered how it s hould be treated in light of the fact that we must determine the applicable 2013 volume for biom ass-based diesel this year, but we will not set the 2013 standards (including the advanced bi ofuel standard for 2013) until next year. EPA has the authority to reduce the applicable volume of advanced biofuel in the event that it reduces the applicable volume of cellulosic biofuel. EPA will consider using this authority at the time it evaluates whether the 2013 applicable volume of cellulosic biofuel set in the statute should be lowered in light of projected production vol umes. In both 2010 and 2011 EPA lowered the applicable volume of cellulosic biofuel without lowering the a pplicable volume of advanced biofuel. EPA is today proposing the same approa ch for 2012. In light of this history, and the fact that EPA cannot finally eval uate the issue of potentially lo wering the applicable volume of advanced biofuel for 2013 until it sets the 2013 st andards in November of 2012, we assume for purposes of today’s evaluation of biomass-base d diesel demand in 2013 that the applicable volume of 2.75 bill gallons of advanced biofuel sp ecified in the statute for 2013 will be used in setting the 2013 advanced biofuel standard.

As described in Section II, the cellulosic biofuel industry conti nues to develop, with numerous projects under development, planned or underway. Nevertheless, the actual production volumes continue to fall far below the a pplicable volumes specified in the statute. For instance, we are proposing a cellulosi c biofuel volume of 3.55 - 15.7 mill gallons for 2012,Page 72 of 184 compared to the applicable volume of 500 mill gal specified in the statute. In 2013, the applicable volume doubles to 1.0 bill gallons. While we have not projected specific volumes of cellulosic biofuel that may be av ailable in 2013, it is highly likely that they will fall significantly short of 1.0 bill gallons, and are likely to co mprise only a small portion of the 2.75 bill gal applicable volume for advanced biofuel in 2013.

Imported sugarcane ethanol can also be used to meet the advanced biofuel standard. Between years 2000 and 2009, the volume of ethanol imported into the U.S. has ranged from 46- 730 million gallons per year, or on average, appr oximately 200 million gallons per year. These volumes were comprised almost exclusively of sugarcane ethanol from Brazil. In 2010, imports of ethanol into the U.S. were among the lowest in the past 10 years, reaching only 17 million gallons. 29 Some of this recent decline in ethanol im ports may be due to extremely wet weather in 2009/10 and dry conditions in 2010/11 which cut into Brazilian supplies of sugarcane and reduced sugar content. In addition, some Br azilian sugarcane mills have the ability to switch between producing sugars for sweetener markets a nd extracting sugars for ethanol markets. The international price of sweetene r was so attractive in 2010 that mills may have given greater priority to sugar. Another factor is the expanding sales of flex fuel vehicles in Brazil, which has continued to increase Brazilian domestic etha nol demand, thus likely limiting amounts available for exports. Therefore, history shows that the volume of imported ethanol can fluctuate greatly due to a variety of market influences.

29 Official Statistics of the U.S. Department of Commerce U.S. International Trade Commission. Data only available from January-November 2010.Page 73 of 184 Longer-term market projections can help to better understand the potential outlook for imports of sugarcane ethanol as a function of inte rnational agricultural and energy markets. One source that evaluates trends and issues for U.S. energy markets is the U.S. Energy Information Administration's (EIA) Annual Energy Outlook (AEO). 30 This report projects U.S. net ethanol imports in 2013 to be 332 million gallons. Another source for U.S. and world commodity projections is the Food and Agricultural Policy Research Institute's (FAPRI) U.S. and World Agricultural Outlook. The most current vers ion of the outlook, the FAPRI 2010 Agricultural Outlook, projects for the year 2013 that the U.S. will have net ethanol imports of 333 million gallons. 31 In comparison, for the RFS2 final ru lemaking, we assumed 190 million gallons of imported sugarcane ethanol could be av ailable in 2013 based on EIA’s AEO2007.

Since ethanol supplies can flow to countries other than the U.S., an important part of understanding potential imports into the U.S. ar e the current and future biofuel mandates and goals of other nations. Such mandates include, fo r instance, Canada’s 5% fuel ethanol mandate which started in late 2010, requi ring approximately 500 million gallons per year. Another goal is that of the EU, the renewable energy direc tive, which includes a minimum target of 10% renewable energy use in transport by 2020, a por tion of which is expected to be met with ethanol. Other countries with ethanol mandates and goals are India, Indonesia, Philippines, Costa Rica, Peru, and Argentina, to name a few. According to Hart Energy Consulting, most countries will be in a potential supply deficit fo r ethanol by 2020, and the primary country in a

30 U.S. Energy Information Administration (EIA). “AEO2011 Early Release,” December 2010. http://www.eia.doe.gov/forecasts/aeo/index.cfm 31 Food and Agricultural Policy Research Institute. “FAPRI 2010 U.S. and World Agricultural Outlook: World Biofuels,” http://www.fapri.iastate.edu/outlook/2010/text/15Biofuels.pdfPage 74 of 184 position to supply the global ethanol market will be Brazil. 32 Chief competitors for the U.S. to receive Brazilian ethanol are expected to be th e EU, China, and Japan. This increasing international demand for biofue ls may limit export supplies available for the U.S. in 2013.

The demand for ethanol in Brazil is also increasing, further limiting volumes that will likely be exported. For instance, the sales share of flex-fuel vehicles (FFVs) in Brazil are reported to have risen dramatically in the last decade, contributing to an in-use fleet that is increasingly capable of operating on pure ethanol. By 2014, 70% of the in-use fleet is expected to be FFVs, compared to only 33% in 2009. Wh ile the aforementioned FAPRI report projected that 2013 Brazilian demand for ethanol could be 7.7 billion gallons, S&D estimated that 2013 demand could potentially reach as high as 11 billion gallons, outpacing Brazilian production capacity. 33

We believe that given the discussions above , it is reasonable to conclude that Brazilian sugarcane ethanol will continue to provide limited volumes of advanced biofuel in the U.S. in the near term due to other competitive uses. While imports of sugarcane ethanol into the U.S. in 2013 could exceed the 190 million gallons estimated in RFS2, they are unlikely to reach the historical high of 730 mill gallons for the reasons described above.

In addition to cellulosic biofuel and impor ted sugarcane ethanol, there is also some potential for other advanced biofuels that could be used to meet the advanced biofuel standard of 2.75 bill gallons. The most likely of these is sugar-based ethanol from domestic sugarcane.

32 Hart Energy Consulting. “Global Biofuels Outlook: 2010-2020,” October 2010. 33 Sucres et Denrées (S&D), "Ethanol Report," November 2010Page 75 of 184 Several companies have announced plans for su gar-based ethanol production in California, Louisiana, and Florida. Two of these comp anies have announced plans for multiple ethanol production facilities, however none of these compan ies have yet begun cons truction. In addition, coprocessed renewable diesel is uncertain, thou gh there could conceivably be up to a hundred million gallons by 2013. Potential production of other advanced bi ofuels such as renewable butanol or ethanol from non-corn starches in biomass-fueled facilities is even less certain for 2013. However, as described in Section II.D, companies such as Gevo, Solazyme, and LS9 are in the process of building or c onverting facilities to produce advanc ed biofuels in the form of butanol, jet fuel, and renewable diesel, respectivel y, that may count as advanced biofuel. We expect all these other sources of advanced bi ofuel to contribute about one or two hundred million gallons in 2013.

In summary, we believe that the total volum e of cellulosic biofuel, imported sugarcane ethanol, and other advanced biofue ls that may be available in 2013 is likely to be less than about 1 billion gallons. In order to reach an advanced biofuel volume of 2.75 billion gallons, then, it is likely that more than 1.0 bill gallons of biomass- based diesel (representing more than 1.5 billion ethanol-equivalent gallons) will be needed. The volume of biomass-based diesel that may be needed in excess of 1.0 bill gallons could potentia lly be on the order of hundreds of millions of gallons. This result is similar to the assumpti on made by IHS Global Insight in their recent report, in which they assume that an additional 300 million gallons of biodiesel will be needed over and above the 1.0 billion gallons mandate fo r biomass-based diesel in order for the advanced biofuel st andard to be met. 34

34 "Biodiesel Production Prospects for the Next Decade," IHS Global Insight, March 11, 2011.Page 76 of 184 As mentioned above, we do not believe it would be prudent to set the biomass-based diesel applicable volume for 2013 such that the increment over 2012 volumes is excessive in comparison to the increments, and trajectory of increments, established by Congress for the years 2009-2012. As a result, we believe that a biom ass-based diesel volume of 1.28 bill gallons would both reflect likely increased demand for biomass-based diesel in 2013 and provide an increment that is not excessive when compared to those established by Congress.

2. Availability of Feedstocks to Produce 1.28 Billion Gallons of Biodiesel

As described above, in the fi nal rulemaking establishing th e RFS2 program we developed renewable fuel volume scenarios for all ye ars between 2010 and 2022. For 2013, we estimated a biomass-based diesel volume of 1.28 bill gall ons. This volume was based primarily on a projection of the qualifying feedstocks that could be available, as summarized in Table IV.B.2-1.

Table IV.B.2-1 Feedstocks Contributing to 2013 Volume of 1.28 bill gal Source Volume (mill gal) Yellow grease and other rendered fats 380 Corn oil 300 Virgin vegetable oil 600 Total 1,280

We continue to believe that the feedst ock volumes shown in Table IV.B.2-1 are reasonable projections for 2013. For instance, acco rding to the U.S. Census Bureau, the total volume of yellow grease and other greases (mos t likely trap grease) produced in 2010 was aboutPage 77 of 184 340 mill gallons 35 . The volume of inedible tallow pr oduced in the same period was over 400 mill gallons. Other potential sources could include edible tallow, lard, an d poultry fats. Taken together, the total volume of available grease and fats for use in producing biomass-based diesel is in excess of the 380 mill gallons we projected in the RFS2 final rule.

The 300 million gallons of biodiesel produced from corn oil extracted from distillers grains produced at ethanol fac ilities is based on projections of the percentage of the ethanol industry using corn oil extraction technology and the amount of oil extracted per bushel of corn in 2013. The RFS2 final rule projected that by 2013, 34% of all dry mill ethanol facilities would extract corn oil from the by-products of ethanol production. A recent survey of the ethanol industry found that by 2008 over 30% of all dry mill ethanol plants were already extracting corn oil from their co-products 36 . EPA expects that the percentage of dry mill ethanol facilities using some form of corn oil extraction technology will increase to 60% by 2013. The corn oil extraction technology currently being used at most dry mill ethanol facilities is capable of extracting approximately one third of the oil contained in the corn kernel from the whole stillage and/or its derivatives (a significantly reduced rate than the two thirds of oil extracted assumed to be technically feasible by 2022 in the RFS2 fina l rule). If 60% of all dry mill corn ethanol facilities were extracting one third of the oil in the corn kernel in 2013 the amount of corn oil available for biodiesel production would be a pproximately 270 million gallons. As corn oil extraction technology develops and higher oil extraction rates are achieved, corn ethanol

35 Current Industrial Reports, U.S. Census Bureau, M311K - Fats and Oils: Production, Consumption, and Stocks, Table 2b. Assumes 7.5 lb/gal. December projection based on the average of January - November. http://www.census.gov/manufacturing/cir/historical_data/m311k/index.html 36 Mueller, Steffen. “Detailed Report: 2008 National Dry Mill Corn Ethanol Survey.” University of Illinois at Chicago Energy Resources Center (May 4, 2010). Available online: http://ethanolrfa.3cdn.net/2e04acb7ed88d08d21_99m6idfc1.pdfPage 78 of 184 producers are likely to adopt this new technology. EPA expects that by 2013 these technology improvements will increase corn oil production levels to the 300 million gallons projected in the RFS2 rule. Alternatively, additional corn oil could come from ethanol production facilities using corn fractionation or wet milling technology. This corn oil was not considered as a biodiesel feedstock in the RFS2 rule, but market conditions may result in its availability to the biodiesel industry. The high adoption rate of corn oil extraction and the promise of ever increasing oil extraction yields indicate that the 300 million gallons of corn oil extraction projected in the RFS2 rule in 2013 remains a reasonable projection.

With regard to virgin vegetable oil, the modeling we conducted for the RFS2 final rule assumed that it would be composed entirely of soyb ean oil. For the purposes of today's proposal we examined recent and historical soybean oil production and consumption volumes from the U.S. Census Bureau to verify that 600 milli on gallons was a reasonable potential volume for biodiesel production in 2013. As shown in Figure IV.B.2-1, soy oil production has increased steadily over the last 30 years, reaching 2.5 bill ga l in 2009. If these production trends continue, domestic soy oil production could re ach nearly 2.9 bill gal by 2013.Page 79 of 184 Figure IV.B.2-1 Historical Domestic Pr oduction of Soybean Oil

Source: Oil Crops Yearbook 2010, U.S. Department of Agriculture, Economic Research Service, Appendix Table 5. Assumes 7.68 lb/gal. 1000 1200 1400 1600 1800 2000 2200 2400 2600 2800 3000

1980 1985 1990 1995 2000 2005 2010 2015Mill gallons of soybean oilPage 80 of 184 To determine what portion of domestically pr oduced soy oil could be available for use in the production of biomass-based diesel in 2013, we also examined recent historical trends for domestic consumption and exports. Domestic consumption of soy oil for purposes other than biofuel has also increased steadily over the last 30 years, but was notably lower in the period 2007 - 2009 compared to previous years. If consum ption returns to historical trends for years after 2009, consumption could be as high as 2.5 bi ll gal by 2013. However, as shown in Figure IV.B.2-2 below, this would require a significant increase in consumption from 2009 to 2010. Thus 2013 consumption could be lower than 2.5 bill gal.Page 81 of 184 Figure IV.B.2-2 Historical Non-Biofuel Domestic Consumption of Soybean Oil

Source: Oil Crops Yearbook 2010, U.S. Department of Agriculture, Economic Research Service, Appendix Table 5. Assumes 7.68 lb/gal. 1000 1200 1400 1600 1800 2000 2200 2400 2600 2800 3000

1980 1985 1990 1995 2000 2005 2010 2015Mill gallons of soybean oilPage 82 of 184 Based on these projections, then, the volume of soy oil that would be available for the production of biomass-based dies el would be at least 400 million gallons (2.9 - 2.5 bill gal). However, soy oil that has historically been ex ported represents anothe r potential source of soy oil for biodiesel production. Exports of soy oil have followed only a very weak increasing trend, averaging about 230 mill gal/year over the same 30 year period, and about 250 mill gal/year over the last 10 years. If these exports were divert ed to the production of biomass-based diesel, the total volume of soy oil available for the productio n of biodiesel and/or renewable diesel would exceed 600 mill gallons.

Although we assumed that all virgin vege table oils used in biomass-based diesel production would be soy oil in the RFS2 final ru le, in fact other seed oils may contribute meaningful volumes to the pool available for the production of biomass-based diesel. For instance, on September 28, 2010 we approved a RIN-generating pathway for biodiesel made from canola oil 37 . The volume of biodiesel made from canola oil was 96 mill gallons in 2008 38

. In addition, we are evaluating other pathways fo r the production of biodiesel from oilseeds, such as camelina, which could potentially be approve d for RIN generation by 2013. Algal oil could also provide additional feedstoc ks if promising technologies fo r production are commercialized.

IHS Global Insight recently released an independent report in which they conducted macroeconomic modeling to investigate biodies el growth scenarios and related impacts on

37 75 FR 59622 38 EPA memorandum, "Summary of Modeling Input Assumptions for Canola Oil Biodiesel for the Notice ofSupplemental Determination for Renewable Fuels Produced Under the Final RFS2 Program," Document # EPAHQ-OAR-2010-0133-0049Page 83 of 184 commodities such as oilseed crops. Their agricultural modeling indicated that a slightly more diverse mix of feedstocks would be used to m eet a total domestic biodi esel production volume of 1.3 bill gallons in 2013. These volumes are shown in Table IV.B.2-2.

Table IV.B.2-2 Feedstocks Contributing to 2013 Volume of 1.3 bill gal from IHS Global Insight Modeling Source Volume (mill gal) Yellow grease and other rendered fats 272 Corn oil 185 Soybean oil 624 Canola oil 68 Palm oil 7 Other 185 Total 1,340 Source: Table 2, "Biodiesel Production Prospects for the Next Decade," IHS Global Insight, March 11, 2011.
This modeling concluded that soy oil production would be lower than the trends shown in Figure IV.B.2-1, with a correspondingly lower volume of soy oil being used for domestic non-biofuel consumption as well. Nevertheless, their modeling concluded that soy oil availability for biodiesel production would be 624 mill gallons, slight ly higher than what we assumed in the RFS2 final rule. While their m odeling concluded that the volumes of greases, fats, and corn oil would be somewhat less than what we assumed in the RFS2 final rule, they were able to quantify the available volumes of other feed stocks that we did not explicitly investigate in the RFS2 final rule. As a result, this report supports our finding that sufficient feedstocks will be available to produce 1.28 bill gallons of biom ass-based diesel in 2013.

3. Production CapacityPage 84 of 184 Total production capacity of the biodiesel industry has exceeded 1.28 bill gallons for a number of years. As of January 2011, total pr oduction capacity was more than 2.8 bill gallons for 168 plants 39 . According to the National Biodiesel Board, 90 of these plants had registered with the EPA under the RFS2 program as of Fe bruary 4, 2011, and these plants had a combined production capacity of over 1.9 bill gallons. The remaining plants are either producing extremely low volumes that fall under the regula tory threshold for RIN generation, are producing products other than biodiesel such as soaps or cosmetics, or have shut down until such time as the demand for biodiesel rises.

Most of the 90 registered plants are currently producing at significantly under capacity, as evidenced by the fact that total production volumes in 2010 were 300 - 400 million gallons, and the registered plants have a capacity of ove r 1.9 billion gallons. If these plants increase production to meet the 800 million gallon volum e requirement for 2011, on average, then, registered biodiesel producers will be producing at about half of their capacity this year. Nevertheless, we believe based on the registered capacity of existing plants and the relative ease of expanding current production within this capac ity that the biodiesel industry can produce at least 1.28 bill gallons in 2013 with little leadtime needed for facilities to ramp up to higher production levels, and/or for currently idle facilities to come back online.

4. Consumption Capacity

Biodiesel is registered with the EPA under 40 CFR Part 79 as a legal fuel for use in highway vehicles. Under this registration, it can legally be used at any blend level, from 1%

39 USA Plants, biodieselmagazine.com, as of January 27, 2011.Page 85 of 184 (B1) to 100% (B100). However, other factors typically limit the concentration of biodiesel in conventional diesel fuel. Since the consumption of biodiesel at lower blend levels would tend to increase the geographic areas where biodiesel must be marketed, it is an important consideration in how much biodiesel can be consumed in the U. S. as a whole as well as how the infrastructure may need to change to accommodate 1.28 bill gallons in 2013.

Most engine manufacturers have explicit statements in their engine warranties regarding acceptable biodiesel blend levels . Although a few permit B100 to be used in their engines without any adverse impact on their warranties, mo st limit biodiesel blends to B20 or less, and about half allow no more than B5 40 . For specific applications where a party knows which engines will be using biodiesel blends, higher concentrations of biodiesel may be possible. However, for general distribution such as at re tail facilities, these warran ty conditions create a disincentive to blend or sell biodiesel at higher concentrations, and would tend to drive most blends towards low concentrati ons of biodiesel such as B5.

Cold weather operability represents another reason for preferential use of B5 and even B2. The most common measure of cold weather operability is the fuel cloud point. The cloud point is the temperature at which gelling begins (as indicated by solid crystals beginning to form in the fuel), and thus is an indicator of when potential engine filter plugging issues could arise. The higher the cloud point temperature of the fu el, the more likely such problems are to be experienced in cold weather. Biodiesel gene rally has a higher cloud point than conventional, petroleum-based diesel fuel, with fat-based biodiesel such as ta llow having a higher cloud point than virgin oil-based biodiesel such as a fuel made with soybean and canola oil. While cloud

40 "Automaker's' and Engine Manufacturers' Positions of Support for Biodiesel Blends," Biodiesel.orgPage 86 of 184 point issues with conventional, petroleum-based diesel are ge nerally mitigated through blending with lighter grades (i.e. #1 diesel fuel), th e cloud point of biodiesel generally requires more dramatic interventions such as heated storage ta nks, lines, and blending equipment, as well as heating rail cars and tank trucks. However, some of these biodiesel cloud point mitigation efforts may be reduced through the use of low bi odiesel blend levels such as B2 or B5, since cloud point is strongly correlated with biodiesel concentration in the final blend. Insofar as biodiesel is blended into conventi onal diesel before being transpor ted to its final destination for sale, low biodiesel blend levels may reduce th e need for heated equipment at the final destination.

Based on highway and nonroad diesel consum ption projections for 2013 from the EIA, a biodiesel volume of 1.28 bill gallons would represent about 2.8% of all diesel fuel 41 . If all biodiesel were to be blended as B5, just over ha lf of the diesel fuel consumed nationwide in 2013 would contain biodiesel. However, today some bi odiesel is blended at concentrations higher than B5, and we expect that at least these sa me volumes would be ble nded at concentrations higher than B5 in the future. This would redu ce the amount of diesel fu el that would contain some biodiesel, and thus would also reduce th e geographical areas where biodiesel must be distributed.

We believe that distributing and consu ming 1.28 bill gallons of biodiesel in 2013 is achievable. A number of states already have mandates for the use of biodiesel in 2013, and efforts are underway to ensure that these mand ates can be met. These include Minnesota, Oregon, Washington, Pennsylvania, New Mexico, a nd Louisiana. Collectively, these states

41 Annual Energy Outlook (AEO) 2011 Early Release, Table 2.Page 87 of 184 account for approximately 13 percent of the nationwide consumption of diesel. Other states have implemented other forms of incentives as shown in Table IV.B.4-1.

Table IV.B.4-1 States with Rebates, Ref unds, Reduced Tax Rates, or Credits for Biodiesel Production or Blending 42 Illinois Indiana Kansas Kentucky

Maine Maryland Michigan Montana North Dakota

Oklahoma Rhode Island South Carolina South Dakota Texas Virginia Washington * Conditions and exemptions for all incentive programs vary by state
Collectively, these states account for approxima tely 37% of the nationwide consumption of biodiesel. A variety of states also have requirements for the us e of biodiesel in state fleets, provisions that allow biodiesel to be used as an alternative to meeting alternative fuel vehicle mandates, and credits/rebates for the installation of biodiesel dispensing an d blending equipment. Altogether, therefore, more than half of the stat es in the U.S. have ma ndates and/or incentives that will induce them to address biodiesel infra structure issues. Efforts in these areas will directionally help the nation to meet a 1.28 b ill gal biomass-based dies el requirement in 2013.

42 U.S. Department of Energy, Alternative Fuels and Advanced Vehicles Data CenterPage 88 of 184 5. Biomass-Based Diesel Di stribution Infrastructure

Biodiesel / petroleum based diesel fuel blends have limited ability to be transported using the existing petroleum product distribution system . There has been limited transportation of up to B5 blends by certain pipelines that do not carry jet fuel. However, concerns over potential contamination of jet fuel with biodiesel currently prev ent biodiesel blends from being transported by the majority of pipelines. 43 The predominant means of biodiesel distribution is to transport it separately by rail car, tank tr uck, or barge to a petroleum ter minal where it is blended with petroleum diesel fuel to make B2, B5, B20 blends that are then transported by truck to retail or fleet operators. For this analysis, we have a ssumed that all biodiesel is transported in a segregated fashion to petroleum terminals. To the extent that biodiesel is transported by pipeline, this may tend to reduce the burden on the fuel distribution system.

Heated and insulated rail cars, tank trucks, barges, storage tanks, and blending equipment are required for biodiesel distri bution to protect against fuel gelling during the cold season. Following are the cloud points of biodiesel ma nufactured from various feedstocks: canola oil biodiesel 32F, soy biodiesel 34F, yellow grease bi odiesel 41F, jatropha oil biodiesel 46F, tallow biodiesel 54F-63F, and palm oil biodiesel 63F. 44 Based on a review of these properties, climactic data, and the likelihood that downstream parties w ill need to accommodate biodiesel

43 Biodiesel contamination of jet fuel can contribute to fuel gelling and engine deposits which can lead to jet engine operability problems. 44 The cloud point refers to the temperature at which biodiesel begins to gell. Biodiesel cloud points are taken from the NC State University and A&T State University Cooperative Extension webpage, updated December 9, 2010, http://www.extension.org/pages/Biodiesel_Cloud_Point_and_Cold_Weather_Issues , and the Biodiesel cold weather blending study, Cold Flow Blending Consortium, National Biodiesel Board, 2001, http://www.nrel.gov/vehiclesandfuels/npbf/pdfs/cftr_72805.pdf.Page 89 of 184 produced from various feedstocks, we believe that heated/insulated biodiesel infrastructure would be needed throughout most of the U.S. 45

Approximately 82 petroleum ter minals blended biodiesel into petroleum-based diesel fuel in 2010. 46 Our evaluation of the changes to the fuel distribution infrastru cture that would be needed to support the use of 920 mill gallons/yr of biodiesel in 2012 and 1,200 mill gallons/yr in 2013 is based on the analysis conducted for the RFS2 final rule. 47 See Table IV.B.5-1.

Table IV.B.5-1 Additional Infrastructure Needed to Distribute Biodiesel in 2012 and 2013 Additional Distribution Assets Needed in 2012 Relative to 2011 Additional Distribution Assets Needed in 2013 (with 1.28 bill gal) Relative to 2012 Total Distribution Assets Needed to Support the 2012 Biodiesel Volume Total Distribution Assets Needed to Support 1.28 bill

gal Biodiesel Volume Petroleum Product Terminals with Biodiesel Blending Capability * 74 130 428 558

Rail Cars 131 230 754 984 Tank Trucks 14 25 83 108 Barges 4 7 23 29 *There are approximately 853 petroleum terminals that offer diesel fuel in the U.S.
The RFS2 final rule estimated that additional manifest rail and barge receipt facilities would be needed to accept shipments of biofuels of all type s including biodiesel. 48 We

45 The ASTM International “Standard Specification for Dies el Fuel Oils”, ASTM D975, contains tenth percentile minimum ambient air temperatures for the U.S. 46 Communication from Larry Schafer of the National Biodiesel Board, March 2, 2011. 47 Renewable Fuels Standard Program (RFS2), Regulatory Impact Analysis (RIA), EPA-420-R-10-006, February 2010. 48 Manifest rail refers to the shipment of a product in rail cars in a train that includes rail cars containing other products.Page 90 of 184 concluded that manifest rail and barge shipments of biodiesel would be able to utilize the manifest rail and barge receipt facilities that were initially constructed to handle increased ethanol volumes.

We assume that terminals adding biodiesel capability would install segregated biodiesel storage, in-line biodiesel blending equipment, and facilities to receive shipments of biodiesel by tank truck. In-line blending refers to the proc ess of blending biodiesel into petroleum-based diesel fuel in the delivery line that feeds into the tank truck from the terminal storage tanks. This process ensures an accurate blend ratio and a fully mixed biodiesel/petroleum diesel batch. We also assume that all equipment at terminals as well as the vessels used to transport biodiesel would be heated and insulated to prevent gellin g during the cold season. We anticipate that some terminals may splash blend biodiesel before installing in-line biodiesel injection equipment. Splash blending refers to the process of first loading petroleum-based diesel fuel into a tank truck followed by biodiesel so that the fina l blend meets the desired blend ratio. However, we expect that this approach will be temporary due to the heightened concerns over achieving a correct blend ratio and a fully mixed biodiesel blend that accompanies splash blending. Some terminals may also delay the need to install se gregated/heated biodiesel storage by storing 50/50 blends of biodiesel/petroleum-b ased diesel fuel that is s ubsequently used to manufacture B2/B5/B20 blends for distribution to end user s. These practices may provide additional flexibility if some terminals wish to temporarily defer installing in-line blending equipment and segregated biodiesel storage equipment.Page 91 of 184 The RFS2 FRM analysis concluded that i ndustry would have the capability to add the necessary facilities to distribute biodiesel in a timely fashion to meet the envisioned volumes. 49 Based on industry input, we conti nue to believe that this is the case. Industry activities are currently progressing to ramp up biodiesel c onsumption from the approximately 380 mill gallons estimated to be used in the U.S. in 2010 to the 760 mill gallons that is estimated to be used in 2011 to meet the biomass-based di esel volume requirement. Fo r example, Kinder Morgan and the Renewable Energy Group opene d a substantial biodiesel distribution facility to serve the Chicago area in December of 2010. 50 Magellan also recently announced that it plans to complete its biodiesel blending facility in Sioux Falls Minnesota in 2011. 51 In addition, just as there has been considerable biodiesel production capacity idled due to lack of demand which will be brought back on line as biodiesel volumes ramp up, we believe that ther e are also substantial idled biodiesel distribution assets that could be readily brought back into service.

Renewable diesel / petroleum di esel fuel blends can be tran sported in existing petroleum product transportation infrastr ucture from the point of production to the end-user. 52 The production facility that we expect will account fo r the renewable diesel produced through 2013 currently ships its product short distances by ta nk truck to facilities that produce blends with petroleum-based diesel fuel. To estimate the infrastructure impacts of renewable diesel, we used

49 See sections 1.6 and 4.2.3 of the RIA to the RFS2 final rule. 50 Biodiesel Magazine, November 17, 2010. http://www.biodieselmagazine.com/articles/4568/chicago-areaterminal-soon-to-offer-biodiesel 51 Report to the Legislature, Annual Report on Biodiesel, Minnesota Department of Agriculture, January 15, 2011. http://www.mda.state.mn.us/en/news/government/~/media/Files/news/govrelations/legrpt-biodiesel2011.ashx 52 Colonial Pipeline began allowing shipment of 5% renewable diesel fuel blends beginning January 3, 2011. Colonial pipeline codes and specifications: http://www.colpipe.com/pdfs/Sect%203%20Prod% 20Spec%20Jan%201%202011%20update%20ver%202.pdfPage 92 of 184 the estimate from the RFS2 final rule of 80 mill gallons of renewable diesel in 2013. 53 This volume is close to the production volume estimated for the Dynamic Fuels facility in Geismar, Louisiana that we referenced in the final rule making setting the 2011 RFS standards. However, more recently the U.S. Department of Energy awarded a $241 million loan guarantee for the construction of a renewable diesel facility by Diamond Green. Construction on this 137 million gallon per year project is scheduled to begin in Norco, LA this year and fuel production is scheduled for the first quarter of 2013. EPA does not expect that the production from this facility will have a significant impact on overall biomass-based diesel distribution infrastructure in the U.S. given that the renewable diesel bl ends can be transported in existing petroleum product transportation infrastructure. For the purposes of this analysis we assumed 80 mill gallons of renewable diesel for consistency with the RFS2 final rule and the final rule setting the RFS standards for 2011.

We estimate that a total of 5 tank trucks will be needed to transport 80 mill gallons/yr of renewable diesel to the locations where it is bl ended with petroleum-ba sed diesel fuel in 2012 and 2013. 54 For the purposes of this analysis, we as sumed that approximately one half of this volume will be produced in 2011. We estimate th at an additional 2-3 tank trucks would be needed to transport renewable diesel fuel in 2012/2013 compared to 2011. Once renewable diesel fuel blends are created, further distribution is accomplished in the same fashion as petroleum-based diesel fuel. In the future, the renewable diesel fuel production facility identified may be connected by a short pipeline directly to the Colonial pipeline and/or begin shipping by

53 Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis, EPA-420-R-10-006, February 2010, Table 1.2-3. 54 This is based on each tank truck carrying 7,800 gallons of renewable diesel fuel making 6 deliveries per day. We anticipate that the renewable diesel fu el will be blended directly into storage tanks containing petroleum-based diesel fuel.Page 93 of 184 barge/rail. If shipment by pipeline develops, then no additional transpor tation vessels would be needed to ship renewable diesel fuel compared to petroleum-based diesel fuel. We anticipate that the infrastructure at petroleum terminals necessary to blend the 80 mill gallons/yr of renewable diesel fuel projected for 2012/2013 with petroleum-ba sed diesel fuel will have been put in place by 2011. 55

Based in the above discussion, we believe that sufficient fu el distribution infrastructure will be available to support the use of 1 bill ga l of biomass-based diesel in 2012 and 1.28 bill gal in 2013.

C. Impacts of 1.28 billion gallons of Biomass-Based Diesel

In order to evaluate the impacts of a biom ass-based diesel volume of 1.28 bill gal in the areas required under the statute (s ee Section IV.A), we first cons idered what the appropriate reference would be. Since the statute requires th at the biomass-based diesel volume we set for 2013 be no lower than 1.0 bill gal, this would appear to be a reasona ble reference point. Therefore, in the discussion that follows, we have focused on either a volume of 1.28 bill gal biomass-based diesel, or an increment of 0.28 bill gal biomass-based diesel, depending on the specific sources of information and analyses available.

As described in Section IV.B.1 above, even if we set the applicab le volume for biomassbased diesel at 1.0 bill gal, the demand for biom ass-based diesel in 2013 is likely to be on the

55 To manufacture a renewable diesel fuel blend at a petr oleum terminal, renewable diesel fuel may be delivered directly into storage tanks that contain petroleum-based dies el fuel or injected into a petroleum-based diesel fuel stream during delivery into a tank truck or pipeline.Page 94 of 184 order of 1.28 bill gal or more due to the limited projected availabilit y of other advanced biofuels (including cellulosic biofuel, imported sugarcane ethanol, and others). Since the actual demand for biomass-based diesel would likely be 1.28 bill ga l or higher regardless of whether we set the biomass-based diesel requirement at 1.0 or 1.28 bill gal, the net impact of setting the biomassbased diesel volume requirement at 1.28 bill gallons in 2013 could be seen as zero.

We recognize that this conclusion is based on an applicable advanced biofuel volume of 2.75 bill gallons. While we will be considering the possibility of lowering the 2013 advanced biofuel applicable volume below 2.75 bill gal in next year's rule making, we have not presumed any such reduction in today's NPRM. Such reduc tions in advanced biofuel must occur in the context of determining the a pplicable volume of cellulosic biofuel for 2013, and using information available at that time regarding advanced biofuel volumes that are projected to be available in 2013.

Nevertheless, the statute re quires that we analyze specifi ed environmental and other impacts in deriving an applicable biomass-ba sed diesel volume for 2013 and other years, and these analyses can be conducted for 1.28 bill gal biomass-based diesel (or an increment of 0.28 bill gal). Most of the areas we are required to analyze were covered in the RFS2 final rule in some form, and we believe that we can use this information in satisfying our statutory obligations to analyze specified factors in dete rmining the applicable volume of biomass-based diesel for 2013.Page 95 of 184 Some of the analyses presented in the RFS2 final rule were for the specific case of 1.28 bill gallons in 2013. These analyses included an investigation of the ex pected annual rate of commercial production of biom ass-based diesel in 2013, impact s on agricultural commodity supply and price, and the cost to consumers of tr ansportation fuel. Some of these were discussed in Section IV.B above. Most of the analyses in the RFS2 final rule, however, were conducted to represent full implementation ofthe RFS2 program in 2022. In these analyses, the biomassbased diesel volume was estimated to be 1.82 bill ga llons, and was compared to a reference case in which biodiesel volume was 380 mill gallons. These cases are shown in Table IV.C-1.

Table IV.C-1 Primary Reference and Control Cases from RFS2 Final Rulemaking (billion gallons) Advanced Biofuel NonAdvanced

Biofuel Total Renewable Fuel Cellulosic Biofuel Biomass-Based Diesel Other Advanced Biofuel Cellulosic

Ethanol Cellulosic Diesel FAME a Biodiesel NCRD b Other Biodiesel c Imported Ethanol Corn Ethanol Reference 0.25 0 0.38 0 0 0.64 12.29 13.56

Control 4.92 6.52 0.85 0.15 0.82 2.24 15.00 30.50
a Fatty acid methyl ester (FAME) biodiesel b Non-Co-processed Renewable Diesel (NCRD)
c Other Biodiesel is biodiesel produced in addition to the am ount needed to meet the biomass-based diesel standard.

The biomass-based diesel volume of 1.82 bill gallons analyzed for 2022 in the RFS2 final rule is higher than the 1.28 bill gallons we chose to evaluate for today's NPRM for 2013. More importantly, the change in biodiesel production due to EISA mandates for biomass-based diesel plus other diesel anticipated to meet the advanced biofuel volum e (a total increase of 1.44 billion gallons compared to the reference case without the EISA mandates) is much larger than the change we are evaluating for 2013 (0.28 billion gallons). Additionally, many of the impactsPage 96 of 184 analyzed for the RFS2 final rule reflected the whole biofuel mandate, not the relatively smaller portion just due to biodiesel. Other changes in renewable fuels analyzed for 2022 were also larger than what would likely occur in 2013. Therefore, the impacts we would expect in 2013 compared to a case without RFS2 in place would likely be similar to or smaller than those we estimated for 2022. Given these considerations, we believe that the impacts assessments in the RFS2 final rule can be used to determin e the directional impacts, and therefore the reasonableness, of a 1.28 billion gallon volume re quirement for biomass-based diesel in 2013.

1. Climate Change

Since biodiesel has a GHG benefit exceeding 50% compared to the petroleum-based diesel it is replacing, an in crease in biomass-based diesel of 0.28 Bill gal from 2012 to 2013 would lead to a displacement of conventional diesel fuel, with corresponding GHG emissions reductions. This increased use of biomass-based diesel will contribute to lower climate change impacts in comparison to the petroleum-based diesel it is replacing.

However, due to the nested nature of the RF S2 standards, biomass-based diesel is also used to meet the advanced biof uel standard. Moreover, both biom ass-based diesel and advanced biofuel must meet a GHG reduction threshold of 50%. If the 2013 advanc ed biofuel standard were to remain at the 2.75 bill gal specified in the statute, an increase in the biomass-based diesel volume requirement from 1.0 to 1.28 bill gal would not change the total volume of advanced biofuel, and thus the total volum e of biofuels that must meet a 50% reduction in GHGs would remain unchanged. Under such circumstances, a standard of 1.28 bill gal of biomass-basedPage 97 of 184 diesel would have essentially no impact on climate change in the context of the full mix of biofuels used to meet the RFS2 requirements.

2. Energy Security4

An analysis of the energy security impacts of the increased use of renewable fuels was conducted in support of the RFS2 rulemaking. Based on that analysis, increasing usage of renewable fuels including bioma ss-based diesel helps to reduce U.S. petroleum imports. A reduction of U.S. petroleu m imports reduces both fi nancial and strategic risks associated with a potential disruption in supply or a spike in cost of a particular energy source. This reduction in risks is a measure of improved U.S. energy secur ity. In the RFS2 final rule, we described in detail the methodology and the Agency’s estimate of the energy security impacts of the RFS2 rule. While EPA’s analysis of energy security benefits of the RFS2 volumes considered the full volume of biofuels mandated by 2022 (of which biodiesel was only a part), the production of biodiesel is largely from domestic feedstocks. In contrast, the di esel fuel displaced is produced from petroleum sources which are increasingly from foreign sources. Therefore biodiesel production and use will contribute to a U.S. energy security benefit.

3. Agricultural Commodities and Food Prices

For the RFS2 rule, we examined the impact s of increased renewable fuels production on commodity prices, food prices and trade in agricu ltural products. This analysis considered the impacts of all the biofuel feedstock sources anticipated to meet the 2022 biofuel volumePage 98 of 184 requirements, not just biodiesel. For the RFS2, EPA used two primary models for its agricultural economic impacts analysis, the Food and Agricultu re Sector Optimization Model (FASOM), and the Food and Agricultural Policy Research In stitute-Center for Agriculture and Rural Development (FAPRI-CARD) models. The FASO M model is a long-term economic model of the U.S. forest and agriculture sectors that maximizes the net present value of the sum of producer and consumer surplus across the two s ectors over time subject to market, technology, and other constraints. The FAPRI-CARD models are a system of econom etric models covering many agricultural commodities in the U.S. and internationally. They are based on historical data analysis, current academic research, and a reliance on accepted economic, agronomic, and biological relationships in ag ricultural production and markets. 56

To meet the RFS2 renewable fuel volumes, a number of price effects on the agricultural commodities were estimated for 2022. For instan ce, FASOM estimates that an increase in renewable fuel volumes to meet the RFS2 would result in an increase in the U.S. soybean prices of $1.02 per bushel (10.3 percen t) above the Reference Case price in 2022. FASOM also projected the price of soybean oil would incr ease by $183 per ton (37.9 percent) over the 2022 Reference Case price (all prices are in 2007$). Most of the additional soybeans needed for increased biodiesel production ar e diverted from U.S. exports to the rest of the world. In FASOM, soybean exports decrease by 135 million bushels (-13.6 percent) in 2022 relative to the AEO2007 Reference Case. This change represents a decrease of $453 million (-4.6 percent) in the total value of U.S. soybean exports in 2022. However, these price eff ects are not attributed to the demand for biodiesel feed stocks alone, rather the compounding affect of all changes in feedstock demand estimated to result from the total biofuel mandate in 2022. Since the impact

56 (add reference to FAPRI description document used in RFS2 FRM)Page 99 of 184 on soybeans due to biodiesel demand was only a por tion of this total feedstock impact and since the impact in 2013 will be less than considered in 2022 (since the 2013 biodiesel volumes anticipated are less than those for 2022), the impact on soybean prices and exports from an increase to 1.28 bill gall in 2013 could also be less.

A recent report by IHS Global Insight 57 also discusses potential agricultural and economic impacts from increasing vegetable oil de mand for biodiesel production. According to this study, existing soybean yield technologies ar e expected to be applied increasingly across the U.S., resulting in roughly a 10% higher growth rate in soybean yields than USDA’s projections from 2010-2016 which were used by EPA in its RFS2 analyses. Similarly, Global Insight predicts these higher yield technologies to be implemented in other large soybean-producing countries, such as Brazil and Argentina. If hi gher yields than modeled for RFS2 indeed are realized, then it is likely the price increases for soybean oil will be less than estimated for RFS2. Likewise, other price impacts, such as those on food prices, would still move in the same direction (i.e., an increase in price resulting from an increase in demand) but could be smaller than in the RFS2 analysis.

For the analyses performed for the RFS2 final rule, EPA estimated a $10 per person per year increase in food costs due to the tota l annual impact of the RFS2 program by 2022 compared to a Reference case that assumed no R FS2 renewable fuel requirements. Again, the biodiesel impacts would represent only a small portion of these overall impacts and would like be even smaller in 2013 due to the sm aller volume of feedstock required.

57 "Biodiesel Production Prospects for the Next Decade," IHS Global Insight, March 11, 2011.Page 100 of 184 4. Air Quality

This section discusses our a ssessment of the impacts of 1.28 bill gal of biomass-based diesel on emissions and air quality. We are rely ing on the analyses of renewable fuel impacts conducted in support of the RFS2 rule 58 to qualitatively discuss the expected impacts of this biomass-based diesel volume. The RFS2 anal yses reflect EPA’s most current assumptions regarding biodiesel emission impacts. 59

In the RFS2 rule, we analyzed both changes in pollutant emissions (measured in tons) and changes in ambient air quality associated with the changes in pollutant emissions. The changes in pollutant emissions were calculat ed by comparing the 2022 RFS2 renewable fuel volumes to volumes if the RFS2 mandate was not in place (the reference scenario). 60 The analysis reflected full implementation of the RFS2 program in 2022 and accounted for impacts from multiple types of renewable fuels, of which biodiesel was only one type. Specifically, the RFS2 emissions inventory analysis assumed 1.82 bill gal of biodiesel in the RFS2 scenario compared to 0.38 bill gal of biodiesel in the refe rence scenario, reflecting a 1.44 bill gal increase in biodiesel with the rule in place.

Biodiesel emission impacts from the RFS2 ru le emissions inventory analysis are presented in Table IV.C.4-1. A complete di scussion of the emissions inventory analysis

58 75 FR14670, March 26, 2010 59 U.S. EPA 2010, Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis. EPA-420-R-10-006. February 2010. Docket EPA-HQ-OAR-2009-0472-11332. Section 3.1.1.2.4 60 In the RFS2 Regulatory Impact Analysis, we analyzed the mandated 2022 RFS2 renewable fuel volumes relative to volumes required by two reference scenarios: RFS1 mandate (7.1 billion gallons of renewable fuels) and AEO 2007 (13.6 billion gallons of renewable fuels). Both reference scenarios assumed the same volume of biodiesel, so the emission and air quality impacts described in this section are the same for both reference scenarios.Page 101 of 184 conducted for the RFS2 rule can be found in Chapte r 3 of the RFS2 Regulatory Impact Analysis (RIA). 61 These biomass-based diesel emission impacts, which reflect a 1.44 bill gal increase in biodiesel, are all less than 1% of the total U. S. emissions inventory for each pollutant. We expect the impacts of the 1.28 bill gal of biomass-based diesel, as compared to the 1.0 bill gal statutory minimum volume, to be smaller.

Table IV.C.4-1 Biodiesel Emission Impacts of the RFS2 Renewabl e Fuel Volumes (1.82 bill gal) Relative to the Reference Case (0.38 bill gal) Biodiesel Impacts of RFS2 Rule Emissions Inventory Analysis ( Δ 1.44 bill gal Biodiesel) Percent RFS2 Total U.S. Inventory Upstream a

(tons) Downstream b (tons) Total (tons) VOC -1,049 -2,422 -3,471 -0.03% CO 913 -4,104 -3,191 -0.01% NOx -290 1,346 1,056 0.01% PM10 4,268 -569 3,699 0.10% PM2.5 632 -315 317 0.01% SO2 1,580 0 1,580 0.02% NH3 4,171 0 4,171 0.10% Benzene 10 -30 -20 -0.01% Ethanol 0 0 0 0.00% 1,3-Butadiene 0 -16 -17 -0.10% Acetaldehyde 2 -66 -65 -0.14% Formaldehyde 1 -182 -181 -0.21% Naphthalene -1 0 -1 -0.01% Acrolein 63 -9 54 0.84%

a U.S. EPA 2010, Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis. EPA-420-R-10-006. February 2010. Docket EPA-HQ-OAR-2009-0472-11332. Table 3.2- 11. Note: units in Table 3.2-11 were mislabeled as tons/mmBTU. Actual units are tons. b U.S. EPA 2010, Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis. EPA-420-R-10-006. February 2010. Docket EPA-HQ-OAR-2009-0472-11332. Table 3.2-9

.

61 U.S. EPA 2010, Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis. EPA-420-R-10-006. February 2010. Docket EPA-HQ-OAR-2009-0472-11332.Page 102 of 184 The air quality analysis for the RFS2 rule us ed photochemical modeling to characterize primary pollutants that are emitted directly into the atmosphere and secondary pollutants that are formed as a result of complex chemical reactions within the atmosphere. Included in the air quality modeling scenarios for the RFS2 rule were large volumes of ethanol as well as other renewable fuels, and the nature of these complex chemical interactions makes it difficult to determine the air quality impacts of biodiesel alone. Specifically, the RFS2 air quality analysis reflects a roughly 21 bill gal increase in ethanol, far outweighing the volume increase in biodiesel (0.43 bill gal). A complete discussi on of the RFS2 air quality analysis and its limitations can be found in Chapter 3 of the RFS2 Regulatory Impact Analysis (RIA). 62

The RFS2 air quality analysis was completed earlier than the final emissions inventory analysis because of the length of time needed to conduct photochemical modeling. 63 The air quality analysis assumed 0.81 bill gal of biodiesel in the RFS2 scenario compared to 0.38 bill gal of biodiesel in the reference s cenario, reflecting a 0.43 bill gal increase in biodiesel use with the rule in place.

Given the small emissions impact of a 0.43 bill gal increase in biodiesel on the total U.S. emissions inventory (the basis for our air quality modeling scenarios), we would expect the portion of air quality impacts attributable to a move from 1.0 to 1.28 bill gal (a 0.28 bill gal biodiesel increase) to be small enough that on a nationwide basis the air quality impact would likely not be noticeable.

62 U.S. EPA 2010, Renewable Fuel Standard Program (RFS2) Regulatory Impact Analysis. EPA-420-R-10-006. February 2010. Docket EPA-HQ-OAR-2009-0472-11332. 63 Emissions serve as inputs to the air quality modeling analysis. However, the final fuel volume assumptions (upon which the emission estimates were based) increased between the time that emissions were estimated to support the air quality modeling analysis and the time emissions were estimated to reflect the final rulemaking.Page 103 of 184 We note that Clean Air Act section 211(v) re quires EPA to analyze and mitigate, to the greatest extent achievable, adverse air quality impacts of the renewable fuels required by the RFS2 rule. We intend to addr ess any potential adverse impacts from increased renewable fuel use through that study and will promulgate appropriate mitigation measures separate from today's NPRM.

5. Transportation Fuel Cost

For the RFS2 final rulemaking, we estimated the year-by-year per-gallon costs for diesel fuel due to the RFS2 biofuel requirements. Fo r 2013, we based our diesel fuel cost estimate on the production and use of biodiesel, renewable diesel fuel and some cellulosic diesel fuel. The unsubsidized cost increase is 0.2 cents per gall on, but accounting for the subsidy, we estimated a cost savings to consumers for diesel fuel of 1.7 cents per gallon. This assumes a crude oil price of 81 dollars per barrel, which is within the rang e of crude oil prices ove r the last several years which have ranged from $35 per barrel to $147 per barrel.

6. Deliverability and Transport Costs of Ma terials, Goods, and Products Other Than Renewable Fuel

EPA evaluated in the RFS2 final rule the impacts on the U.S. transportation network from the distribution of the total additional volume of bi ofuels that would be used to meet the RFS2 standards. Oakridge Nati onal Laboratory (ORNL) conducte d an analysis of biofuelPage 104 of 184 transportation activity from production plants to petroleum terminals by rail, barge, and tank truck to identify potential distribution constraint s to help support the assessment in the RFS2 final rule. 64 The ORNL analysis concluded that the increase in biofuel shipments due to the RFS2 standards would have a minimal impact on U.S. transportation infrastructure. The majority of biofuel transportati on is projected to be accomplishe d by rail. Nevertheless, it was estimated that the biofuels tran sport would constitute only 0.4% of the total freight tonnage for all commodities transported by the rail system through 2022. 65 Given the small increase in freight shipments due to the trans port of biofuels to meet the RFS2 standards, we believe that the distribution of biofuels will not adversely impact the deliverability and transport costs of materials, goods, and products ot her than renewable fuels.

7. Wetlands, Ecosystems, and Wildlife Habitats

As directed by CAA section 211(o)(2)( B)(ii), in setting the 2013 biodiesel volume requirements, EPA is to consider the impact s of biodiesel production and use on wetlands, ecosystems and wildlife habitat.

The most complete and up-to-date assessment of these impacts is contained in the draft analysis prepared by EPA in response to the requirements set out in CAA section 204. This

64 “Analysis of Fuel Ethanol Transportation Activity and Potential Distribution Constraints”, Oakridge National Laboratory, March 9, 2009. To simplify the ORNL analysis, biomass-based diesel volumes were assumed to originate at the same points of production and to be shipped to the same petroleum terminals as the ethanol projected to be used to meet the RFS2 standards. This may tend to overstate the potential impact on the transportation system from the shipment of biomass-based diesel fuels since biomass-based diesel production plants were projected to be more geographically dispersed than ethanol production facilities. In any event, the simplifying assumption was assessed to have little impact on the results from the anal ysis given that biomass-based diesel represented only 8% of the total projected biofuel volumes. 65 See sections 1.6.4 and 1.6.5 of the RFS2 RIA.Page 105 of 184 report has been released in draft form in order to allow interested par ties to provide comments on the analyses and policy implications. Concluding this review and the peer review, updates will be made to the report, and then the final re port will be published in 2012 on the EPA Biofuels web site. Nevertheless, since th is draft report includes an assessm ent of the impact of biofuels on a number of the areas that we are required to analyze in the process of determining the 2013 biomass-based diesel volume, we believe it is appropriate to make use of this information as it represents the most current EPA assessments available. 66

This draft report relies on information av ailable as of July 2010. The report does not attempt to quantify the impacts of biofuel production and use as these impacts are dependent on local or regional conditions. Nevertheless the draft provides qualitative assessments and reasonable expectations of trends which can be used to consider the environmental impacts of increases in biodiesel production and use. Thes e trends are only summarized here while the draft report provides ex tensive detail.

The draft assessment focuses on the use of oil from soy beans as the feedstock for biodiesel production. Other oil seed feedstock so urces represent a very small portion of biofuel production in 2013 so would be expected to have mu ch less of an impact than soy oil. Corn oil extracted during the ethanol production process is increasing, adds a very small increment of process GHG and will offset demands for soy and other oil seed crops, thus reducing potential agricultural impact of biodiese l production and adding to the net reduction in GHG emissions. Finally, waste fats, oils and greases would be ex pected to have negligible environmental impact

66 U.S. EPA. Biofuels and the Environment: the First Triennial Report to Congress (External Review Draft). U.S. Environmental Protection Agency, Washington, DC, EPA/600/R-10/183A, 2011. http://cfpub.epa.gov/ncea/cfm/recordisplay.cfm?deid=217443Page 106 of 184 as a feedstock since they do not impact agricultu ral land use and would otherwise be used for some lower value purpose or simply discarded.

Wetlands can be adversely affected by ag ricultural production through runoff that can result in nutrient loading (particularly from fer tilizers) or from sediment ation (from erosion). Soy production tends to use less fe rtilizer than corn production (the most likely alternative crop) and can reduce the amount of fertilizer required for corn when planted in rotation with corn. However, compared to other crops, erosion can be higher from fields planted in row crops such as corn and soy beans. While the impacts of nutri ent loading and erosion tend to be site specific, good farming practices including the optimum fer tilizer use and the set aside of sensitive lands via the CRP program can significantly help control these adverse affects. Wetlands can also be adversely affected through diversion of surface and ground water for agricultural irrigation. Soy bean production less frequently relies on irrigatio n than corn and some other crops. More discussion on water usage is included below in the section on water use and water quality impacts.

Ecosystems and wildlife hab itat can be adversely affected if CRP lands are converted to crop production, if row crops such as soy beans re place grassy crops and in general if new lands with diverse vegetation are converted to crop prod uction. As noted in the RFS2 rule, we do not expect the RFS program production to result in an increase in total ac res of agricultural land under production in the US compared to a refe rence case without the impact of the RFS2 volumes . The relatively small increase of 0.28 b ill gall should not appreciably affect the amount of land devoted to oil seed production. Further, since soy beans are traditionally planted inPage 107 of 184 rotation with other crops such as corn, this small increase in soy oil demand for biodiesel production is unlikely to replace grassy crops or result in the indirect increase in land under crop production. Additionally, the USDA commitment to support the CRP program should minimize the likelihood of any significant change in the am ount of CRP land. Therefore, while some very local changes may result due to individual farm er’s planting decisions, since no new crop land are expected in the U.S. due to this increase in biodiesel production a nd sensitive lands will be protected via programs such as CRP, no measureable impact in aggregate ecosystems or wildlife habitat is expected.

8. Water Quality and Quantity

The water quality and quantity impacts of biodies el are primarily related to the type of feedstock and the production practices used to both produce the feedstock and to convert the feedstock into biodiesel. Soybeans are the prin cipal feedstock used fo r biodiesel production and are predicted to account for 600 million gallons of the 1.28 billion gallons evaluated for 2013. Non-food grade corn oil extracted during etha nol production, animal fats and recycled fats account for most of the remaining biodiesel feedst ocks. Since these fats are the byproduct of another use and not produced speci fically for biodiesel manufacture and since corn oil extracted is a by-product of corn ethanol production, this analysis will focus on soybeans

From a water quality perspective, the pr imary pollutants of concern from soybean production are fertilizers (nitroge n and phosphorus) and sediment . There are three major pathways for these potential pollutants to reach water from agricultural lands: runoff from thePage 108 of 184 land’s surface, subsurface tile drains, or leachi ng to ground water. C limate, hydrological, and management factors influence the potential for these contaminants to reach water from agricultural lands.

a. Impacts on Water Quality and Water Quantity Associated with Soybean Production

After corn, soybeans are the second largest ag ricultural crop in terms of acreage in the U.S. As with the production of any agricultu ral crop, the impact on water quality depends on a variety of factors including production practices, use of conservation practices and crop rotations by farmers, and acreage and intensity of tile drained lands. Additional factors outside agricultural producers’ control include soil characteristic s, climate, and proximity to water bodies.

Soybeans are typically grown in the same locations as corn since farmers commonly rotate between the two crops. In 2005, the latest year for which USDA collected data, the U.S. average nitrogen fertilization rate for soybeans was 16 pounds per acre. In contrast, the average nitrogen fertilization rate fo r corn was 138 pounds per acre. 67 Soybeans fix nitrogen, so they do not require substantial added fertilizer for adequate yields. Only 18 percent of soybean acres are fertilized with nitrogen compared to 96 percent of corn acres. 68 Since significantly less nitrogen fertilizer is applied to soybeans, less nitrogen is available for runoff or leaching into water.

67 U.S. Department of Agriculture, Economic Research Service. Fertilizer Use and Price. http://www.ers.usda.gov/Data/FertilizerUse 68 U. S. Department of Agriculture, National Agricultural Statistics Service. 2007. Agricultural chemical usage 2006 field crops summary. Available at: http://usda.mannlib.cornell.edu/usda/nass/AgriChemUsFC//2000s/2007/AgriChemUsFC-627 05-16- 2007_revision.pdfPage 109 of 184 Water quality generally benefits when soybeans ar e rotated with corn, since the next corn crop requires less fertilizer and fewer pesticides. Therefor e, crop rotation is one practice that is part of an effective system to limit water quality impacts. However, soybeans have less residue remaining on the field after harvest compared to corn, so sediment runoff could be more of a

concern.

Agricultural conservation systems can redu ce the impact of soybean production on the environment. The systems components include 1) controlled applica tion of nutrients and pesticides through proper rate, timing, and method of application, 2) controlling erosion in the field (i.e., reduced tillage, terraces, or grassed waterways), and 3) trapping losses of soil and fertilizer runoff at the edge of fields or in fiel ds through practices such as cover crops, riparian buffers, controlled drainage for tile drains, and constructed/restored wetlands. 69

The effectiveness of conservation practi ces, however, depends upon their adoption. The USDA‘s Conservation Effects Assessment Project (C EAP) quantified the ef fects of conservation practices used on cultivated cropland in the Uppe r Mississippi River Basin. It found that, while erosion control practices are commonly used, th ere is considerably less adoption of proper nutrient management to mitigate nitrogen loss to water bodies. 70 However, as noted above, the relatively low amount of fertilizer used for soy bean production tends to lessen the potential for nitrogen loss to water bodies

69 Dinnes, DL; Karlen, DL; Jaynes, DB; Kaspar, TC; Hatfield, JL; Colvin, TS; Cambardella, CA. 220 2002. Nitrogen management strategies to reduce nitrate leaching in tile-drained 221 midwestern soils. Agronomy Journal 94(1): 153-171. 70 U.S. Department of Agriculture, National Resources Conservation Service. 2010. Assessment of the effects of conservation practices on cultivated cropland in the Upper Mississippi River Basin. Available at: http://www.nrcs.usda.gov/technical/NRI/ceap/umrb/index.html

.Page 110 of 184 Water for soybean cultivation predominat ely comes from rainfall, although about 11 percent of soybean acres in the U.S. are irrigated. 71 Water use for irrigated soybean production in the U.S. varies from 0.2 acre-feet per acre in Pennsylvania to about 1.4 acre-feet per acre in Colorado, with a national averag e of 0.8 acre-feet of water. 72

b. Impacts on Water Quality and Water Quantity Associated with Biodiesel Production

Biological oxygen demand (BOD), total suspended solids, and glycerin pose the major water quality concerns in wastewater discharged from biodiesel facilities. Actual impacts depend on a range of factors, including the type of feed stock processed, biorefiner y technology, effluent controls, and water re-use/recycling practices, as well as the facility location and source and receiving water.

Despite the existing commercial market for glycerin and the likely expanded uses for glycerin as discussed in the RFS2 final rule, th e rapid development of the biodiesel industry has caused a temporary glut of glycerin production, re sulting in some instances of facilities disposing glycerin. Glycerin disposal may be regulate d under several EPA programs, depending on the practice. However, there have been incidences of glycerin dumping, including an incident in

71 U.S. Department of Agriculture. 2010. 2007 Census of agriculture, Farm and ranch irrigation survey (2008). http://www.agcensus.usda.gov/Publications/2007/Online_Highlights/Farm_and_Ranch_Irrigation_Survey/fris08.pdf 72 U. S. Department of Energy. 2006. Energy demands on water resources: Report to Congress on the interdependency of energy and water. Available at: http://www.sandia.gov/energy-water/docs/121-RptToCongressEWwEIAcomments-FINAL.pdfPage 111 of 184 Missouri that resulted in a large fish kill. 73 Some biodiesel facilities discharge their wastewater to municipal wastewater treatment systems for tr eatment and discharge. Th ere have been several cases of municipal wastewater treatment plant ups ets due to high BOD loadings from releases of glycerin. 74 To mitigate wastewater issues, some production systems reclaim glycerin from the wastewater. Closed-loop systems in which water a nd solvents can be recycled and reused can reduce the quantity of water that must be pretreated before discharge.

Biodiesel can also impact water bodies as a re sult of spills. However, biodiesel degrades approximately four times faster than petroleum diesel including in aquatic environments. 75 Results of aquatic toxicity testing of biodiesel indicate that it is less toxic than regular diesel. 76 Biodiesel does have a high oxygen demand in aquatic environments, and can cause fish kills as a result of oxygen depletion. Water quality impacts associated with spills at biodiesel facilities generally result from discharge of glycerin, rather than biodiesel itself.

Biodiesel facilities use much less water than ethanol facilities to produce biofuel. The primary consumptive water use at biodiesel plants is associated with washing and evaporative processes. Water use is variable, but is usually less than one gallon of water for each gallon of

73 U.S. EPA. 2010b. Renewable fuel standard program (RFS2) regulatory impact analysis. EPA-420-R-10-006. Available at: http://www.epa.gov/otaq/renewablefuels/420r10006.pdf

.. 74 U.S. EPA. 2010b. Renewable fuel standard program (RFS2) regulatory impact analysis. EPA-420-R-10-006. Available at: http://www.epa.gov/otaq/renewablefuels/420r10006.pdf

.. 75 Kimble, J. n.d. Biofuels and emerging issues for emergency responders. U.S. EPA. Available at: http://www.epa.gov/oem/docs/oil/fss/fss09/kimblebiofuels.pdf

. 76 Kahn, N; Warith, MA; Luk, G. 2007. A comparison of acute toxicity of biodiesel, biodiesel blends, and diesel on aquatic organisms. Journal of the Air and Waste Management Association 57(3): 286-296.Page 112 of 184 biodiesel produced; some facilities recycle wash water, which reduces overall water consumption. 77

9. Job Creation and Rura l Economic Development

The RFS2 is anticipated to increase employ ment and spur income expansion in rural areas and farming communities. Income expansion in rural areas from renewable fuel production will contribute to rural economic de velopment. As mentioned above, industry activities are currently progressing to ramp up biodiesel consumption from the approximately 380 mill gallons estimated to be used in the U.S. in 2010 to the 800 mill gallons that is estimated to be used in 2011 to meet the RFS2 biomass-ba sed diesel volume requirement. In addition, it is anticipated that biodiesel production capacity idle d due to lack of demand will be brought back on line as biodiesel volumes ramp up. Also, expa nsions to the fuel di stribution infrastructure (i.e., more fuel terminals, rail car s, tank trucks, barges etc.) will be needed to support the use of 1 bill gal/yr of biodiesel in 2012 and 1.28 bill gal/ yr in 2013 based on the analysis conducted for the RFS2 final rule. 78 Bringing online idle biodiesel plan ts and expanding biodiesel distribution infrastructure in the U.S. will increase bot h employment and promote rural economic development. These increases in employment are similar to what EPA anticipated when it analyzed the RFS2 rule.

77 Renewable Fuels Standard Program (RFS2), Regulatory Impact Analysis (RIA). EPA-420-R-10-006. Available at: http://www.epa.gov/otaq/renewablefuels/420r10006.pdf

. 78 Renewable Fuels Standard Program (RFS2), Regulatory Impact Analysis (RIA), EPA-420-R-10-006, February 2010. Available at: http://www.epa.gov/otaq/renewablefuels/420r10006.pdf

.Page 113 of 184 D. Proposed 2013 Volume for Biomass-Based Diesel

We are proposing an applicable volume of 1.28 bill gal biomass-based diesel for 2013, consistent with our projection for 2103 in the RF S2 final rule. The 0.28 bill gal increment over the 2012 applicable volume that is reflected in this proposal does not deviate substantially from the trend in annual increments that Congress es tablished in specifying applicable volumes for biomass-based diesel for 2009 through 2012. As noted in Section IV.B, because we are not proposing to change the 2013 advanced biofuel app licable volume in this rulemaking, we have used the 2.75 bill gallon applicable volume for th e analyses in today’s proposal. Given an advanced biofuel applicable volume of 2.75 bill gallons for 2013, the proposed 1.28 bill gal biomass-based diesel volume requi rement is not expected to fo rce any additional biomass-based diesel volumes into the market in 2013. As a re sult, the increase in biomass-based diesel from the statutory minimum of 1.0 bill gal to 1.28 bill ga l could be seen as not having any impact beyond what is anticipated to result from meeting the current 2.75 bill gal advanced biofuel applicable volume..

However, compared to a reference case without the RFS2 mandates, 1.28 bill gal of biomass-based diesel will lead to displacement of fossil-based fu el, which will result in reduced GHG emissions from the transportation sector and in creased energy security. There are likely to be some negative consequences associated with increased air and water pollution, increased food prices, impacts to wetlands, etc., as discussed abov e. However, EPA does not believe that these impacts outweigh the benefits of moving to an applicable volume of 1.28 bill gal for 2013. By requiring somewhat more biomass based diesel use in 2013 than the statutory minimum, we arePage 114 of 184 also making it more likely that we will not need to modify the advanced biofuel mandate in 2013 and, therefore, that the Congressional goal for advanced biofuel use in 2013 can either be satisfied, or at least come closer to satisfaction. EPA solicits comment on all issues related to this proposal.

E. 2014 and Beyond

EPA is directed under CAA 211(o)(2) to de termine the required biomass-based diesel volumes no less than 14 months ahead of the first year that they would be applicable, and thus we could propose biomass-based diesel volumes for 2014 and beyond in today's NPRM. Doing so would provide certainty for the industry and st ability for future investments and contracts. However, we are not proposing biomass-based diesel standards for 2014 and beyond in today's NPRM since we believe we will be in a better position in the future to evaluate all of the factors related to establishing an applicable volume for 2014 and later years.

We are aware of two sources that provide pr ojections of biomass-based diesel for years after 2013: the RFS2 final rulemaking, and a rece nt report released by the IHS Global Insight 79

. The projections from both of these sources are shown in Table IV.E-1

79 "Biodiesel Production Prospects for the Next Decade," IHS Global Insight, March 11, 2011.Page 115 of 184 Table IV.E-1 Projections of biom ass-based diesel after 2012 (bill gallons) RFS2 Final Rule IHS Global Insight Report 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 1.28 1.39 1.53 1.56 1.60 1.64 1.68 1.72 1.77 1.82 1.34 1.50 1.81 2.18 2.53 2.74 3.00 3.14 3.23 3.30

We will consider these and other sources when we determine the required biomass-based diesel volumes for 2014 and beyond, whether in this or a future rulemaking.Page 116 of 184 V. Proposed Changes to RFS2 Regulations

As the RFS2 program got underway in the second half of 2010, we discovered that a number of regulatory provisions were causing conf usion among regulated par ties. In some cases the confusion was due to a lack of specificity in terms, while in othe rs it was due to unique circumstances that were not sufficiently addresse d in the RFS2 regulations. A few amendments are being proposed in order to correct regulatory language that inadvertently misrepresented our intent as reflected in the preamble to the final RFS2 regulations. Finally, as we have worked with regulated parties to ensure that the RFS program is operating as intended, we identified areas in the regulations that could benefit from clarification and/or st reamlining. We also identified one provision in the gasoline benzene re gulations that misrepresented our intent as stated in the preamble. As a result, we are proposing a number of amendments to the RFS regulations, and one amendment to the gasoline benzene regulations, in 40 CFR Part 80.

A. Summary of Amendments

Below is a table listing the provisions that we are proposing to amend in today’s action. We have provided additional expl anation for several of these amendments in Sections V.B through V.F below.

Table V.A-1 Summary of Technical Amendments Section Description 80.1275(d)(3) Removed to allow for the inclusion of transferred blendstocks in the calculation of benzene early credits. 80.1401 Amended definition of "annual cover crop" to clarify that the cropPage 117 of 184 has no existing market to which it can be sold except for its use as feedstock for the production of renewable fuel.

80.1401 Amended definition of “naphtha” to clarify that it applies to hydrocarbons only, must be commonly or commercially known as naphtha, and is used for producing gasoline. 80.1405(a), (b), and (d) Amended to state the standards fo r 2012 and the date of the annual standards calculation.

80.1405(c) Amended terms “GE i ” and “DE i ” to reference the amount of gasoline and/or diesel produced by small refi neries and small refiners that are exempt pursuant to §§80.1441 and 80.1442. 80.1415(c)(2) Amended to state the specific re quirements needed for technical justifications for applicati ons for Equivalence Values.

80.1426, Table 1 Amended to add ID letters to pathways to facilitate references to specific pathways and to change the reference to “canola” to “canola/rapeseed”. 80.1426(f)(1) Corrected typographical error in cross reference to paragraph (f)(6) of §80.1426.

80.1426(f)(5)(ii) Amended requirements so that th e separated yard waste plans and separated food waste plans need not be approved by EPA, but instead only need to be accepted by EPA under the registration provisions. 80.1429(b)(2) Amended to clarify that "fossil-base d” diesel fuel is different from renewable diesel fuel.

80.1429(b)(9) Amended to include RIN separation limitations on parties whose non-export RVOs are solely related to imports of gasoline and diesel or the use of blendstocks to produce gasoline or diesel.

80.1449(a) Amended Production Outlook Report due date; added allowance for unregistered renewable fuel pr oducers and importers to submit Production Outlook Reports. 80.1450(b)(1)(vi) Amended to require submission of additional evidence as part of registration to verify eligibility for exemptions in §80.1403(c) or (d).

80.1450(d)(1)-(d)(3) Amended to add more specificity on when updates, addenda, or resubmittals are required for engineering reviews and to include references to foreign ethanol producers. 80.1451(a)(1)(xi) Amended to clarify that this secti on references RFS1 RINs retired for compliance. 80.1452(b)(2) Corrected typographical error.

80.1452(b)(4) Amended to clarify that a RIN-generating importer must submit to EMTS the EPA facility registration number of the facility at which the renewable fuel producer or fore ign ethanol producer produced the batch.

§80.1452(b)(5) Amended to clarify that for imports of renewable fuel, the RINgenerator must submit to EMTS the EPA facility registration number of the importer that imported the batch. 80.1460(b)(6) Added to clarify that RINs cannot be generated more than once for a single batch of renewable fuel. 80.1464(a)(2)(iii), Added to clarify that audito rs must verify that product transferPage 118 of 184 (a)(2)(iv), (b)(2)(iii), (b)(2)(iv), (c)(1)(iii), and (c)(1)(iv) documents for RIN transactions cont ain the required information for obligated parties/exporters and for renewable fuel producers/importers. 80.1464(a)(2)(i), (a)(3)(ii), (b)(2)(i), (b)(3)(ii) Amended to clarify that auditors must validate RIN separations for obligated parties/exporters and for renewable fuel producers/importers; amended to correct typographical error. 80.1465(h)(2); 80.1466(h)(2); and 80.1467(e)(1), (e)(2), and (g)(2) Amended to remove the option of using an alternative commitment in lieu of paying a bond and to clarify the amount of bond a foreign entity must post.

B. Technical Justification for Equivalence Value Application

A producer or importer of renewable fuels is required to submit an equivalence value (EV) application in accordance with §80.1415(c) for any renewable fuel that does not have an EV listed in §80.1415(b). In addition, a producer or importer could apply fo r an alternative EV if the producer or importer has reason to believe that a different EV than that listed in §80.1415(b) is warranted. Secti on 80.1415(c) provides the calculation equation for the EV of the renewable fuel and the requirements for the technical justification to be submitted in the EV application.

We have received many inquiries from pr oducers and importers of renewable fuels requesting clarification of the specific requirements for the technical justification listed in §80.1415(c). In addition, based on the many EV app lications we have ev aluated, we have found that we needed to request additional inform ation from producers a nd importers to better understand the composition of the renewable fuel th ey produced, such as intermediate steps andPage 119 of 184 energy inputs in production process, sources of renewable and non-renewa ble feedstock, and so forth, to better evaluate and assign the correct EV to the producer or importer’s renewable fuel.

Therefore, we are proposing to amend §80.1415( c)(2) to provide clarification to the current requirements and to include additional requirements for the technical justification to be submitted in the EV application. The pr oposed amendments to §80.1415(c)(2) include: - A calculation for the requested equivalence value according to the equation in §80.1415(c)(1), including supporting documentation for the energy content (EC) of the renewable fuel such as a certificate of analysis from a laboratory that verifies the lower heating value in Btu per gallon of the renewable fuel produced. - For each feedstock, component or additive us ed to make the renewable fuel, provide a description, the percent input and identify whet her or not it is renewable biomass or is derived from renewable biomass. - For each feedstock that could independently qualify as a renewable fuel, state whether or not RINs have been previously generated for the feedstock. - A description of renewable fuel and the production process, including a block diagram that shows quantities of all inputs and output s required at each step of the production process for the production of one batch of renewable fuel.

C. Changes to De finitions of TermsPage 120 of 184 1. Definition of Annual Cover Crop

As explained in the preamble of the RFS2 final rulemaking, EPA extended modeling for cellulosic biofuel made from corn stover and biodiesel/renew able diesel made from waste oils/fats/greases to annual cove r crops, based on the expectation that cultivation of annual cover crops, as defined in §80.1401, will have little impact on the agricultural commodity markets and therefore little or no land use impact associated with them. Therefore, certain fuels (as specified in Table 1 to §80.1426) derived from annual cover crop feedstocks qualify for D-codes under the advanced biofuel, biomass- based diesel, and cellulosic renewable fuel categories.

Section 80.1401 of the final RFS2 rule define s “annual cover crop.” We are proposing to amend the definition of annual cove r crop in order to more clearly define those feedstocks that meet the intent of including cover crops in several pathways in Table 1 to §80.1426.

In order to extend our modeling to cover crops , we used the rationale that annual cover crops would have no land use impact since they are planted on land otherwise used for crop production. Greenhouse gas emissions would only be associated with growing, harvesting and transporting the cover crop, and then processing into biofuel. (See 75 FR 14794 col. 3.) Thus, we assumed that no additional la nd would be required to plant annual cover crops, that cover crops would not displace primary crop production, and that the use of the cover crop as a feedstock for renewable fuels would not ha ve secondary impacts on other agricultural commodity markets. This implies that annual c over crops would not be planted and harvested for the purpose of being sold to existing markets. If a cover crop already had an existing market,Page 121 of 184 then the increased use of cover crops as f eedstocks for renewable fuel production could potentially impact the existing markets. Therefor e, we propose to amend the current definition for “annual cover crop” to clarify that for pur poses of the RFS program the term only includes crops that have no existing market to which they can be sold except for the use of the feedstock for renewable fuel. This will ensure that no unintended land use or significant indirect effects result from the use of annual cover crops as feedstocks for renewable fuel production.

EPA recognizes that there may be additi onal fuel pathways requiring lifecycle greenhouse gas (GHG) assessments and the assignm ent of appropriate RIN D-Codes, including those using feedstocks that do not meet the pr oposed amended definition of annual cover crop. For further guidance on the process for requestin g EPA evaluation of new fuel pathways, please refer to the following sites:

http://www.epa.gov/otaq/fuels/renewablefu els/compliancehelp/rfs 2-lca-pathways.htm

http://www.epa.gov/otaq/fuels/renewablefuels/ compliancehelp/lca-petition-instructions.htm#1

2. Definition of "Naphtha"

In the RFS2 final rule, we included seve ral RIN-generating pathways in Table 1 for naphtha made from renewable bi omass. We also provided a definition of naphtha in §80.1401. However, the definition we finalized was overl y broad and did not adequately represent ourPage 122 of 184 intent to limit naphtha to gasoline blendstocks. As a result, some biofuel producers have expressed interest in interpreting the term "naphtha" to include materials that, while falling within the boiling range of gasoline, are not used as a blendstock to produce gasoline.

To remedy this situation, we are proposing to revise the definition of naphtha to also specify that it applies only to blendstocks which are composed of only hydrocarbons, are commonly or commercially known as naphtha, and are used to produce gasoline.

D. Technical Amendments Related to RIN Generation and Separation

1. RIN Separation Limit for Obligated Parties

We propose to amend section 80.1429 to limit the amount of RINs a company who is an obligated party solely by virtue of importation of obligated fuel can separate to their Renewable Volume Obligation (RVO). This change would address the instance where a party may import a small amount of obligated volumes and then separate all the RINs that it owns. This change is designed to prevent abuse of the obligated pa rty RIN separation provision by a company that imports a relatively small amount of an obligated volume, but then separates a large amount of RINs. The proposed provision is also designed to help prevent the hoarding of RINs by parties that do not need them for compliance purposes, an d to generally increase liquidity of RINs.. EPA structured the original RFS1 separati on regulations around facilitating compliance byPage 123 of 184 obligated parties meeting their RVOs. The proposed change keeps with the original design and also ensures that importers can separate e nough RINs to meet their obligations.



### 2 . RIN Retirement Provision for Error Correction

In some instances, renewable fuel producers or importers may impr operly generate RINs in EMTS as a result of calculation errors, mete r malfunctions or clerical errors. Pursuant to §80.1431(a), improperly generated RINs are invalid, and cannot be used to achieve compliance with any Renewable Volume Obligations (RVOs). The regulations also prohibit any party from creating or transferring invalid RINs. These i nvalid RIN provisions apply regardless of the good faith belief of a party that the RINs are valid. Because of the ‘‘buyer beware’’ aspect of the RIN program, RIN generators should ta ke all appropriate ac tions to ensure that they are properly generating RINs, and all parties in the RIN di stribution system should take all a ppropriate actions to ensure that they are not trading invalid RINs or using invalid RINs for compliance
purposes.

The ‘‘buyer beware’’ aspect of the RIN prog ram provides an important incentive for the regulated community to comply with the regula tions. Although EPA believes that these selfpolicing mechanisms are a critical component of the RFS2 regulations, we seek comment on the possibility of amending §80.1431 to provide the regulated community with limited flexibility to allow certain RINs that were improperly generate d to nevertheless be transferred and used for compliance. We envision that this type of flexibility could reduce disruptions to the RIN market while, if appropriately limited, continuing to apply appropriate pressure on parties that generate,Page 124 of 184 transfer and use RINs to comply with the regulations. Parties that improperly generate RINs would remain liable for ge nerating invalid RINs.

We believe that the following general limitati ons should apply to any flexibility to allow improperly generated RINs to be transferred and used for complia nce: 1) the RINs must have been improperly generated as a result of an ina dvertent error, 2) the improperly generated RINs must have the correct D code, 3) the RIN generator must correct the information submitted to EMTS and retire an equivalent number and type of any excess RINs that were generated as a result of the error within fixed time period, 4) th e flexibility to allow improperly generated RINs to be used for compliance would only apply if the number of excess RINs generated for a particular batch exceeds the number of RINs that should have been generated by some fixed percentage, and 5) the flexibility to allow improperly generated RINs to be used for compliance could not be repeatedly used by a renewable fuel producer.

We are seeking comment on whether EPA shoul d amend the regulations to include this flexibility, whether the conditions set forth above are appropriate, and whether there are additional or alternative conditions that should be imposed if the flexibility is granted. We seek comment on specifying a 60-day time period for a RIN-generator to correct RIN information submitted to EMTS and limiting the availability of this flexibility to situations where the number of excess RINs generated for a particular batch exceeds the number of RINs that should have been generated by no more than 2%. In addition, we seek comment on the possibility of establishing a limit on the number of times this flexibility could be used within a compliance period by a given RIN generator. Such a limitation could encourage RIN generators to takePage 125 of 184 appropriate measures to avoid generating invalid RINs, and limit the possibility that RIN generators would intentionally ge nerate invalid RINs to take a dvantage of short term RIN price spikes. EPA seeks comment on all aspects of this proposal



### 3 . Production Outlook Reports Submission Deadline

In the final RFS2 regulations, in §80.1449(a) , EPA set the annual deadline for submitting Production Outlook Reports as March 31 of each y ear. However, EPA has determined that, in order for the information contained in the Produc tion Outlook Reports to be most useful when setting the RFS2 volume requirements and associated percentage standards for the following calendar year, the reports should contain the mo st accurate projections possible. Since the accuracy of projections tends to increase the closer those projections are made to the following calendar year, we believe that the March 31 deadli ne should be moved to June 1. This revised deadline would still allow the information cont ained in the Production Outlook Reports to be used in the development of the final rulemaking setting the standards for the following year.



### 4 . Attest Procedures

In the final RFS2 regulations, EPA require d in §80.1464(c)(1)(i) and (c)(2)(ii) that RIN owners conduct attest procedures for RIN transa ction and RIN activity reports that involve RIN separations. This requirement wa s intended to be included in the attest procedures for obligated parties and exporters as well as for renewable fuel producers and RIN-generating importers, in order to confirm that RINs are being properly separated by all parties participating in the RINPage 126 of 184 market. Thus, today’s rule proposes amendments to §80.1464(a)(2)(i) and (a)(3)(ii) for obligated parties and exporters as well as to §80.1464(b)(2)(i) and (3)(ii) for renewable fuel producers and RIN-generating importers to include attest procedures concerning verification of RIN separation.

Additionally, in the final RFS2 regulati ons, EPA required in §80.1464 that auditors of RIN generation reports verify that product tran sfer documents (PTDs) include the required information. EPA believes it would be beneficial for auditors to verify the required information is present on PTDs for RIN transactions for all parties, including obligat ed parties, renewable fuel producers and importers and RIN owners. Thus, today’s rule proposes amendments to §80.1464(a)(2), (b)(2) and (c)(1) to require auditors to verify that the PTDs for a representative sample of RINs sold and purchased c ontains the information required in §80.1453.



### 5 . Treatment of Canola and Rapeseed

On September 28, 2010, EPA published a “Suppl emental Determina tion for Renewable Fuels Produced Under the Final RFS2 Progra m from Canola Oil” (FR Vol. 75, No. 187, pg 59622-59634). We are proposing to clarify two aspect s of the supplemental determination. First we propose to amend the regulatory language in Table 1 to 40 CFR 80.1426 to clarify that the currently-approved pathway for canola also applies more generally to rapeseed. While “canola” was specifically described as the feedstock eval uated in the supplementa l determination, we had not intended the supplemental deter mination to cover just those vari eties or sources of rapeseed that are identified as canola, but to all rapeseed. We currently interpret the reference to “canola” in Table 1 to 40 CFR 1426 to include any rapeseed. To eliminate ambiguity caused by thePage 127 of 184 current language, however, we propose to replace th e term “canola” in that table with the term “canola/rapeseed”. Canola is a type of rapesee d. While the term “canola” is often used in the American continent and in Australia, the term “rapeseed” is often used in Europe and other countries to describe the same cr op. We believe that this change will enhance the clarity of the regulations regarding the feedstocks that qualif y under the approved canola biodiesel pathway.

Second, we wish to clarify that although the GHG emissions of producing fuels from canola feedstock grown in the U.S. and Canada was specifically modeled as the most likely source of canola (or rapeseed) oil used for biodiesel produced for sale and use in the U.S., we also intended that the approved pathway cover can ola/rapeseed oil from other countries, and we interpret our regulations in that manner. We expe ct the vast majority of biodiesel used in the U.S. and produced from canola/rapeseed oil will come from U.S. and Canadian crops. Incidental amounts from crops produced in other nations will not impact our average GHG emissions for two reasons. First, our analyses consider ed world-wide impacts and thus considered canola/rapeseed crop production in other countries . Second, other countries most likely to be exporting canola/rapeseed or biodiesel product from canola/rapeseed are likely to be major producers which typically use similar cultivars and farming techniques. Therefore, GHG emissions from producing biodiesel with canola/ra peseed grown in other countries should be very similar to the GHG emissions we modeled for Canadian and U.S. canola, though they could be slightly (and insignificantly) higher or lower. At any rate, even if there were unexpected larger differences, EPA believes the small amounts of feedstock or fuel potentially coming from other countries will not impact our threshold anal ysis. Therefore, EPA interprets the approved canola pathway as covering canola/rape seed regardless of country origin.Page 128 of 184 E. Technical Amendments Related to Registration 1. Construction Discontinuance & Completion Documentation

The registration requirements in §80.1450(b)(1)(v i) state that for facilities claiming the exemption described in §80.1403(c) or (d), eviden ce must be submitted demonstrating the date that construction commenced. However, the re gistration requirements do not explicitly require the submission of evidence demonstrating that they meet certain of the other requirements described in §80.1403(c)(1) and (2) or (d)(1), (2) and (3).

In order to verify that facilities whic h claim to qualify for an exemption under §80.1403(c) or (d) in fact meet all of the qualific ation requirements for such an exemption, we are proposing to amend §80.1450(b)(1)(vi) to include requirements that the owner or operator of facilities claiming exemption unde r §80.1403(c) submit evidence dem onstrating that construction was not discontinued for a period of 18 months after construction began, and that construction was completed by December 19, 2010. Similarly, we are proposing that for facilities claiming the exemption under §80.1403(d), evidence be sub mitted demonstrating th at construction was not discontinued for a period of 18 months after construction began and that construction was completed within 36 months of the date that constr uction commenced..

In addition, we are proposing to add a general provision in (§80.1450(b)(1)(vi)(D) requiring the submission of additional documen tation and information as requested by the Administrator. This authority would be used in the event that documents submitted in accordancePage 129 of 184 with requirements §80.1450(b)(1)(vi)(A) and (B) are not sufficient for EPA to verify that the facility has met all re quirements described in §80.1403(c) or (d).

2. Third-Party Engineering Reviews

The regulations stipulate that producers of renewable fuels and foreign ethanol producers are required to update their registration inform ation, and submit an upda ted independent thirdparty engineering review, every 3 years after their initial registration in accordance with §80.1450(d)(3). We have received many inquiries re garding the start date that EPA uses to determine the 3 year period after which the pr oducer must submit an upda ted independent third party engineering review (such as the registra tion acceptance date, the third-party professional engineer’s signature date on the engineering review report, or when the engineering review is due for grandfathered and non- grandfathered facilities).

Given the lack of clarity in the current regulations, we are proposing amendments to specify the time frame for submission of updated i ndependent third-party engineering reviews. We are proposing, a simplified method that w ould group producers according to the calendar year they were or will be registered, and se tting a fixed time frame for registration updates for each group. Therefore, we are proposing to am end §80.1450(d)(3), to stipulate that for all producers of renewable fuel and foreign etha nol producers in which their registration was accepted by EPA in calendar year 2010, that the updated registration information and independent third-party engineering review shall be submitted to EPA within the three months prior to January 1, 2014, and within three months pr ior to January 1 of every third calendar yearPage 130 of 184 thereafter. For all producers of renewable fuel and foreign ethanol producers registered in any calendar year after 2010, the updated registrati on information and inde pendent third-party engineering review shall be submitted to EPA within three months prior to January 1 of every third calendar year after the first year the pr oducer’s registration was accepted by EPA. For example, a producer registered in 2011 would be required to submit an updated independent third-party engineering review by January 1, 201 5, and by January 1 every three calendar years thereafter.

3. Foreign Ethanol Producers

We are proposing that the amendments to the registration requirements in §80.1450 also apply to foreign ethanol producers. As defined in §80.1401, foreign ethanol producers are foreign producers that produce ethanol for use in tr ansportation fuel, heating oil or jet fuel but who do not add denaturant to their product. Therefore, foreign ethanol producers do not technically produce ‘‘renewable fuel’’ as defined in our regulations. As discussed in the preamble to the Direct Final Rule published on May 1, 2010 (see 75 FR 26032), the result of the amendments made in the Direct Final Rule is to require foreign ethanol facilities that produce ethanol that ultimately becomes part of a renewable fuel for which RINs are generated to provide EPA the same registration information as foreign renewable fuel facilities that export their product to the United States. In both cases the re quired registration information is important for enforcement purposes, including verifying the us e of renewable biomass as feedstock and the assignment of appropriate D c odes. Therefore, we believe amendments to the registrationPage 131 of 184 requirements that we make in this proposed rule should also be applicable to foreign ethanol producers for same reasons.

F. Additional Amendmen ts and Clarifications

1. Third-Party Engineering Review Addendum

We have received many inquires as to whet her an addendum to the existing independent third-party engineering review is sufficient to meet the requirement that all producers of renewable fuel and foreign ethanol producer s submit an updated inde pendent third-party engineering review if they make changes to their facility that will qualify the renewable fuel that is produced for a renewable fuel category or D code that is not already reflected in the producer’s registration information. In some circumstances the majority of the information verified in the existing independent third-party engineering revi ew would remain the sa me, and duplicating the entire effort does not appear necessary. We believe the concept of allowing the submission of an addendum in lieu of a updated i ndependent third-party engineer ing review is reasonable and therefore we are proposing to amend the require ments in §80.1450(d)(1) to state that a producer of renewable fuel or foreign ethanol produc er may submit an addendum to the existing independent third-party engineering review on file with EPA provided the addendum meets all the requirements in §80.1450(b)(2) and verifies for EPA the most up-to-date information at the producer’s existing facility. The updated inde pendent third-party engineering review or addendum shall be submitted at l east 60 days prior to producing the new type of renewable fuel and must meet all the same requirements sti pulated in §80.1450(b)(2) for the independent third-Page 132 of 184 party engineering review, including a new site vi sit conducted by the third-party to verify any changes to the facility that allows it to produce a different renewable fuel that is not currently reflected in their registration on file with EPA.

2. RIN Generation for Fuel Imported from a Registered Foreign Producer

In RFS2, EPA finalized provisions allowing importers to generate RINs for renewable fuel imported from a foreign producer only under cer tain circumstances. The importer may only generate RINs for fuel imported from a foreig n renewable fuel producer or foreign ethanol producer if that producer is registered with EPA and has received EPA company and facility identification numbers pursuant to §80.1450. Pursuant to §80.1426(c)(4), the importer is prohibited from generating RINs for fuel imported from a foreign producer that is not registered with EPA. In today’s rule, EPA is clarifying that when an importer is generating RINs for fuel imported from a registered foreign renewable fu el producer or foreign ethanol producer, the importer must submit to EPA via EMTS the importer’s company identification number, the facility identification number of the import facility where the batch was imported, and the facility identification number for the foreign renewable fuel or ethanol producer that produced the batch of fuel for which the importer is genera ting RINs. These clarifications are being made in §§80.1452(b)(4) and (5).

3. Bond PostingPage 133 of 184 We are proposing to amend paragraphs (e )(1), (e)(2) and (g)(2) of §80.1467 to make them consistent with §80.1467(g)(1). These amendm ents attempt to clarify that the amount of the posted bond must post must cover the number of gallon RINs that are sold and/or transferred, and also those RINs held and/or obtained by th e foreign entity, including those held and/or obtained to comply with a foreign importer's RVO requirements. We are also proposing to amend §§80.1465-80.1467 by striking §§80.1465(h)(2)(iii), 80.1466(h)(2)(iii) and 80.1467(e)(2)(iii), which allowed en tities to make alte rnative commitments in lieu of posting bonds. EPA believes that this method is va gue, unnecessary, and unenforceable.

4. Acceptance of Separated Yard Waste and Food Waste Plans

We are proposing to amend §80.1426(f)(5)(ii)(A) to remove the requirement that the separated yard waste plan and se parated food waste plan must be approved by EPA, and instead only require that these two plans be submitte d and accepted by EPA under the registration procedures specified in §80.1450(b)(1)(vii). The de tails and information re quired to be submitted in the separated yard waste plan and separate d food waste plan are not overly burdensome or complex, and therefore we belie ve it does not warrant a specifi c EPA approval, but that EPA acceptance of these plans through the re gistration procedures is sufficient.

5. Transferred Blendstocks in Early Benzene Credit Generation Calculations

Today’s rule also proposes one minor corr ection to the gasoline benzene regulations which would clarify how refiners should account for transferred blendstocks in their earlyPage 134 of 184 benzene credit generation calculations. Under curre nt rules, refineries which generated early benzene credits are required to reduce gasoline benzene during an early credit generation period by at least 10% compared to the refinery’s be nzene baseline, and are also required to make specific operational changes and/or improvement s in benzene control technology to reduce gasoline benzene levels. 80 Refineries which reduce their ga soline benzene by at least 10%, in part by transferring reformate to another refi nery, could also generate early benzene credits, provided the transferee refinery treated the re formate in specific benzene-reduction processing units. 81 See 72 FR 8486-87 (Feb. 26, 2007). However, the gasoline benzene regulations also contain an additional provision that requires all blendstock st reams transferred to, from or between refineries to be excluded from a refine ry’s early credit generation calculations (except for reformate as described previously). This le d to an inconsistent comparison of a refinery’s benzene during an early credit generation period with a refinery’s benzene baseline (which included blendstocks transferred to the refinery), which was not EPA’s intent.

As described in the preamble of the gaso line benzene final rule, EPA intended that refineries not be allowed to generate early benzene credits exclusively through blendstock trading, without making any other qualifying re ductions (see 72 FR 8487), but that refineries could generate early benzene credits in part th rough qualifying reductions and “in part” through other means such as blendstock transfers (see 72 FR 8496-97). However, the current regulations do not allow this approach, and this inconsistency has caused c onfusion among refiners about how to calculate the amount of early credits ge nerated. Refiners have generally followed the

80 Early credit generation periods were July 1, 2007 thro ugh December 31, 2 007, and calendar years 2008, 2009 and 2010. 81 Refineries produce gasoline by combining several different blendstocks produced by various refinery processing units. Reformate is a blendstock which contains approximately 80% of all benzene found in gasoline, per the MSAT2 regulatory impact analysis.Page 135 of 184 approach set out in the preamble (as EPA in fact intended), and included all blendstocks transferred to a refinery in the refinery’s earl y credit generation calculations. Refiners typically keep records on transferred blendstocks for 1-2 ye ars, and thus do not have sufficient data to exclude transferred blendstocks from their early credit generation calculations.

EPA recently became aware of this inconsistency and is proposing to change the regulations to make them consistent with EPA’s intent as described in the preamble. Today’s proposed rule would amend the gasoline benzene regulations at 40 CFR 80.1275(d)(3) by deleting that provision. This would allow a refine ry to include blendstocks transferred to the refinery in the refinery’s early benzene cred it generation calculations (all other conditions, including treatment which removes benzene in transferred reformate streams still applying, of course). Consistent with EPA’s original intent, today’s rule also allows a refinery to include transferred blendstocks in past early credit gene ration calculations, provided the refinery met all of the other requirements for generating early be nzene credits. EPA is proposing to include transferred blendstocks in past early credit generation calculation not only because this was EPA’s intent at the time of the benzene gasolin e rulemaking, but because some refiners have reasonably relied upon that stated intent in devising their compliance strategies.Page 136 of 184 VI. Petition for Reconsideration

On February 7, 2011, the American Petr oleum Institute (API) and the National Petrochemical and Refiners Association (NPRA) jointly submitted a Petition for Reconsideration of EPA’s final rule establis hing the RFS standards for 2011 82 . EPA is proposing to deny the petition for the reasons described below, and solicits comment on this proposal.

The petition is available in docket EP A HQ OAR 2010-0133. It makes three primary assertions:

1. EPA's 2011 cellulosic biofuel volume requirement of 6.6 million gallons (6.0 million ethanol-equivalent gallons) is unrealistically high. At the most, EPA should have used the estimate of 3.94 mill gallons provided by the Energy Information Administration (EIA).

2. EPA's determination that there are suffi cient sources of advanced biofuel to warrant not reducing the advanced biof uel standard lacks adequate factual support.

3. EPA's treatment of delayed RINs in jects undesirable uncertainty into the regulatory environment, and is contra ry to the basic regulatory framework established by Congress.

82 75 FR 76790, December 9, 2010.Page 137 of 184 The petition requests that EPA reconsider the regulatory requirements in all three areas.

A. Legal Considerati ons of Petition

The API/NPRA petition was submitted under th e reconsideration provisions of section 307(d)(7)(B) of the Clean Air Act (CAA). This section strictly limits petitions for reconsideration both in time and scope. It states that:

Only an objection to a rule or proce dure which was raised with reasonable specificity during the period for public comment (including any public hearing) may be raised during judicial review. If the person raising an objection can demonstrate to the Administrator that it was impracticable to raise such objection within such time or if the grounds for such objection arose after the period for public comment (but within the time specified for judicial review) and if such objection is of central relevance to the outcome of the rule, the Administrator shall convene a proceeding for reconsidera tion of the rule and provide the same procedural rights as would have been af forded had the information been available at the time the rule was proposed. If the Administrator refuses to convene such a proceeding, such person may seek review of such refusal in the United States court of appeals for the appropriate circu it (as provided in subsection (b)). Such reconsideration shall not postpone the eff ectiveness of the rule. The effectivenessPage 138 of 184 of the rule may be stayed during such reconsideration, however, by the Administrator or the court for a pe riod not to exceed three months.

Thus the requirement to convene a proceed ing to reconsider a rule is based on the petitioner demonstrating to EPA: (1) that it was impracticable to raise the objection during the comment period, or that the grounds for such objection arose after the comment period but within the time specified for judi cial review (i.e., within 60 days after publication of the final rulemaking notice in the Federal Register, see CAA section 307(b)(1); and (2) that the objection is of central relevance to the outcome of the rule.

Regarding the first procedural criterion fo r reconsideration, a petitioner must show why the issue could not have been presented dur ing the comment period, either because it was impracticable to raise the issue during that time or because the grounds for the issue arose after the period for public comment (but within 60 days of publication of the final action). Thus, CAA section 307(d)(7)(B) does not provide a forum to request EPA to reconsider issues that actually were raised, or could have been raised, prior to pr omulgation of the final rule.

Regarding the second procedural criterion for reconsideration, in EPA's view, an objection is of central relevance to the outcome of the rule only if it pr ovides substantial support for the argument that the regulation should be revised. 83

83 See Denial of Petitions to Reconsider Endangerment and Cause or Contribute Findings for Greenhouse Gases under section 202(a), 75 FR 49556, 49560 (August 13, 2010 ); Denial of Petition to Reconsider, 68 FR 63021 (November 7, 2003), Technical Support Document for Prevention of Significant Deterioration (PSD) and Nonattainment New Source Review (NSR): Reconsideration at 5 (Oct. 30, 2003) (EPA-456/R-03-005 ) (available at http://www.epa.gov/nsr/documents/petitionresponses10-30-03.pdf ); Denial of Petition to Reconsider NAAQS for PM, 53 FR 52698, 52700 (December 29, 1988), citing De nial of Petition to Revise NSPS for Stationary Gas Turbines, 45 FR 81653-54 (December 11, 1980), and decisions cited therein. Also see EPA’s February 17, 2011Page 139 of 184 B. Advanced Biofuel Stan dard and Delayed RINs

For the concerns raised in the petition related to the treatment of the advanced biofuel requirement for 2011 and the provision for delayed RINs, API and NPRA essentially restate the positions that they took in their comments in response to the 2010 NPRM. For instance, with regard to advanced biofuels, the petitioners did not reference any new data on imports of sugarcane ethanol or the production potential of biodiesel to demonstrat e that the statutory applicable volume of 1.35 bill gallons of advanc ed biodiesel cannot be met in 2011. Likewise with regard to delayed RINs, the petitioners did not cite new circumstances or new information in their assertion that this provision will inject uncertainty into the regulatory system and RIN market. Thus the petition does not provide new information with regard to these two issues or assert arguments that could not have been raised during the comment period. As a result, we do not believe that the petition's request for a reconsideration of these regulatory requirements is justified under CAA 307(d)(7)(B), and we propose to deny the petition with respect to these two issues. We believe that our approach to these matters in the final rulemaking establishing the 2011 RFS standards was appr opriate, for the reasons described in the preamble to that rule.

C. 2011 Cellulosic Biofuel Requirement

denial of petitions by Clean Air Taskforce, World Wildlife Fund, National Wildlife Federation, and Friends of the Earth’ s to reconsider certain elemen ts of the RFS2 program.Page 140 of 184 Regarding the 2011 cellulosic biofuel re quirement of 6.0 million ethanol-equivalent gallons, petitioners make two principal arguments: (1) that the statutory requirement that the cellulosic biofuel requirement be "based on" the estimate provided by the EIA requires EPA to use the 3.94 million ethanol-equivalent gallon EIA es timate regardless of any other information, and (2) that EPA lacked a reas onable basis for its projecti on of 6.0 million ethanol-equivalent gallons.

The first issue raised by petitioners was disc ussed in the RFS2 proposed rule. In the preamble to the 2010 RFS2 Notice of Proposed Ru lemaking, we stated that when projecting cellulosic biofuel production vol umes annually “[w]e intend to examine EIA’s projected volumes and other available data including th e production outlook reports . . . “ that EPA proposed to require renewable fu el producers to submit annually. 84 EPA further explained that the production outlook reports “would be used . . . to set the annual cellulosic biofuel” standard. 85 Neither API nor NPRA submitted comments stating, as they do now, that EPA must in all cases rely on the EIA projection and cannot consider or rely upon other information in establishing the annual cellulosic biofuel standa rd. After evaluating the comments that EPA did receive, we issued a final rule, including applicable volumes and corresponding percentage standards consistent with the proposal. We stated in the preamble to the final rule that “[w]e will examine EIA’s projected volumes and other av ailable data including the required production outlook reports to decide the a ppropriate standard for the following year. The outlook reports

84 74 FR 24966 85 74 FR 24970.Page 141 of 184 from all renewable fuel producers will assist EPA in determining what the cellulosic biofuel standard should be . . “ 86

Petitioners had another opport unity to raise this same issue in the context of the rulemaking establishing the 2011 standards. EPA ag ain made it clear in its proposed rule that the projection that would be provided to us by th e EIA would only be one of several sources of information we would use to determine the a pplicable cellulosic biofuel volume for 2011:

We will complete our eval uation based on comments received in response to this proposal, the Production Outlook Reports due to the Agency on September 1, 2010, the estimate of projected biofuel volumes that the EIA is required to provide to EPA by October 31, and other information that become s available, and will finalize the standards for 2011 by November 30, 2010. 87

These standards are to be based in part on transportation fuel volumes estimated by the Energy Information Administration (EIA) for the following year. 88

As described in the final rule for the RFS2 program, we intend to examine EIA’s projected volumes and other available data including the Production Outlook Reports

86 75 FR 14726. See also 75 FR 14729 (production outlook reports “will help EPA set the annual cellulosic biofuel standard . . . “ and “essential to our annual cellulosic biofuel standard setting . . .”) 87 75 FR 42240 88 Ibid.Page 142 of 184 required under § 80.1449 in making the deter mination of the appr opriate volumes to require for 2011. 89

...each year by October 31 EIA is required to provide an estimate of the volume of cellulosic biofuel they expect to be sold or introduced into commerce in the United States in the following year. EPA will consider this information as well when finalizing a single volume for use in setting the 2011 cellulosic biofuel standard. 90

After considering all of the info rmation before it, EPA proposed a level for the cellulosic biofuel volume that was different from th at contained in the EIA projections. Once again, neither API nor NPRA provided comments in response to the 2010 NPRM on this subject. Accordingly, EPA proposes to deny the petition with respect to the contention that EPA must rely exclusively on the EIA projections in establishing the annu al cellulosic biofuel volumes. That argument does not satisfy the criteria for a petition for r econsideration specified under CAA 307(d)(7)(B) since the issue could have been raised during th e comment period of the 2010 standards rule, but

was not.

As a substantive matter, even if the petitioners were not foreclosed from raising this argument at this time, EPA would propose to deny their claim because the st atute specifies that it is EPA, not EIA, that is to make the deter mination of projected cellulosic biofuel volumes. EPA’s decision is to be "based on" the EIA estimate (as, indeed it was), but EPA interprets the statute to allow it to consider other available information as well in ma king its determination.

89 Ibid. 90 75 FR 42246Page 143 of 184 EPA looked at all available information, includi ng public comments on its proposal, and decided that 6.0 million ethanol-equivalent gallons was a reasonable projection for 2011. This is a reasonable interpretation of an ambiguous stat utory provision, where Congress said “based on” the estimate provided by EIA but did not mandate that the dete rmination be ba sed solely upon this information. EPA carefully considered EIA’s projection and explained why EPA’s determination was different. S ee, for example, Nuclear Energy Institute v. EPA, 373 F.2d 1251, 1269 (D.C.Cir. 2004).

The petition also contends that EPA is required to project the volume of cellulosic biofuel that will "actually" be sold or introduced into commerce in the following year, but that EPA instead established the cellulosic biofuel volume at an “aspirational” leve l. EPA believes that petitioners allegations are not supported by either the statut e or the facts. Under CAA 211(o)(7)(D)(i), for any calendar year for which EPA determines that the projected volume of cellulosic biofuel production is less than the min imum applicable volume established under the statute, EPA is to reduce the applicable volume of cellulosic biofuel to the volume that is projected to be available. The statute speci fies that the projection of cellulosic biofuel production is to be “determined by the Administr ator based on the estimate provided by [EIA],” and that it must be made in time to set the annual standards by November 30 preceding the applicable compliance year. To fulfill its mandate under this provision, EPA undertook an exhaustive evaluation of every existing and potential cellulosic biofuel production facility that could potentially supply cellulosic biofuel for us e in the U.S., and proj ected a production volume for 2011 that reflected a balance between the uncer tainty inherent in the projections and the objective of avoiding unnecessary reductions in the applicable volume set forth in the statute.Page 144 of 184 The requirement to make a pr ojection of cellulosic biofuel vol umes for the following year necessarily means that the projection will be an estimate, and may not be exactly the volume that is "actually" produced. As described in the 2010 NPRM, there are many factors that may result in the actual volume deviating from the projected volume:

• Difficulty/delays in securing necessary funding. • Delays in permitting and/or construction. • Difficulty in scale up, especially for 1st of their kind technologies. • Volumes from pilot and demonstration plants may not be sold commercially. • Not all feedstocks may qualify to produce cellulosic Renewable Identification Numbers (RINs); some still awaiting evaluation of lifecycle impacts. • Likelihood that fuels produced interna tionally will be exported to the United States rather than consumed locally. 91

We do not believe that the statute requires our pr ojection to be 100% accura te, or that it requires that EPA project only what is absolutely or hi ghly certain of production, as the petitioners would prefer. Rather, as described in Section II.B.4, we believe that our projec tion must be reasonable based on the information that is available at the time that the cellulosic biofuel standard is set. The applicable volume established by Congress for cellulosic biofuel is 250 mill gallons for 2011, and in projecting 6 mill gallons of production we lowered the applicable volume by about 98%. The volume of 3.94 mill gallons projected by EIA, and favored by petitioners, also represents a reduction of about 98% from the st atutory applicable volume of 250 mill gallons.

91 75 FR 42245Page 145 of 184 Moreover, with only one exception (Range Fuel, discussed below), the petitioners do not present any new evidence to refute the projected produc tion estimates that EPA made for the various facilities it anticipated would produce fuel in 2011. Their primary arguments are that we are compelled to use EIA’s projection which, as noted above, the statute does not require, and that we are required to project a level with a high degree of certainty.

As discussed in the rule that set the 2011 ce llulosic standard, we believe that the volume of cellulosic biofuel actually produced in a given y ear is likely to be strongly influenced by the standard we set. At this early point in the RF S program, the volume of cellulosic biofuel actually made available will in general not exceed the standa rd that we set, and there is no recourse for increasing the cellulosic biofuel st andard if our projection were to fall short of actual production. Therefore, setting a standard that is lower than what the industry could reasonably achieve could strand investments and/or further delay the industry's ability to move towards the higher levels of commercial production envisi oned in the statute. We believe it is appropriate to consider these factors in projecting production volumes, and th at we are not compelled to rely solely on volumes actually in production at the time we make our decision, as petitioners would prefer.

In the final rule establishing the 2011 pr ojected volume of cellulosic biofuel, we explained our approach to recognizing and ac counting for uncertainty in the projections:

In directing EPA to project cellulosic biof uel production for purposes of setting the annual cellulosic biofuel sta ndard, Congress did not specify what degree of certainty should be reflected in the projections. We believe that the cellulo sic biofuel standardPage 146 of 184 should provide an incentive for the industry to grow according to the goals that Congress established through EISA. However, we also believe that the cellulosic biofuel standard that we set should be within the range of what can be attained based on projected domestic production and import potential. Any estimate we use to set the biofuel standard for 2011 will have some uncertainty in terms of act ual attainment, and the level of such uncertainty generally rises with the volume mandate. Our intention is to balance such uncertainty with the objective of providing an incentive for growth in the industry. To this end we explored the 2011 volumes fo r individual companies as projected by EIA to determine not only what volumes might be anticipated, but more importantly what volumes were potentially attainable. Our fi nal projected available volume of cellulosic biofuel for 2011 reflects these considerations. 92

Thus, our projection was not “aspirational,” as petitioners allege. Instead, we projected a volume that we believed could be reasonably achieved based on the information available at the time the standard was finalized. We acknowledged there were uncer tainties, but balanced our consideration of that uncertainty against the goal of avoiding unnecessarily lowering the applicable volume in the statute. This is a reasonable approach to achieving Congress’ goal of promoting the growth of the use of cellulosic biofue l, taking into account the interests of both the obligated parties and the produ cers of cellulosic biofuels.

The API/NPRA petition does not suggest that the projection of 6.0 mill ethanolequivalent gallons of cellulosic biofuel was not achievable or was not a reasonable balance as discussed above, based on the info rmation available at the time of the final rule. Instead, the

92 75 FR 76794Page 147 of 184 petition focuses on balancing these interests in a manner that places the highest priority on achieving a low or very low degree of uncertainty in whether the projected volumes will in fact be produced. The petition focuses almost solely on the uncertainties associated with this volume and requests that the uncertainties be reduced by lowering the applicable volume of cellulosic biofuel to no more than the EIA projection of 3.94 mill gallons. Little if any priority or emphasis is placed on the importance of establishing conditi ons that reasonably can promote the growth in the production of cellulosic renewable fuel. EPA disagrees that this would be the appropriate balance to draw in implementing this provision, at least in these early years of the RFS2
program.

In arguing for a lower volume based on the uncertainties, the petition highlights the recent history for three companies: Bell BioEnergy, Cello Energy, and Range Fuels. The discussion of Bell BioEnergy and Cello Energy in the petition is an update of the discussion of these same two companies in API's comments s ubmitted is response to the 2010 NPRM. As the petition points out, while the information availabl e at the time of the 2010 NPRM suggested that these two companies could produce cellulosic biofuel in 2011, by the time of the final rulemaking we had obtained update d information and determined th at it would not be reasonable to project any 2011 volume from these two comp anies. At the same time, we added two companies in the final rule that were not incl uded in the 2010 NPRM list of companies that we projected could produce volume in 2011: KiOr and Range Fuels. The changes between the proposed and final lists of companies on which we based our projections for 2011 highlight the fact that, in the emergent cellulosic biofuel industry, any projection of cellulosic biofuel production is highly dependent upon the informati on available at the time of the projection, andPage 148 of 184 that for any given company this information may change in one direction or another. Nevertheless, changes in the projected volume from one company may be counterbalanced or mitigated by production changes for other companies.

With regard to Range Fuels, we reas onably projected a 2011 volume production of 2.3 mill ethanol-equivalent gallons out of the 6.0 mill ethanol-equiva lent gallon volume that we determined was achievable in 2011. Information ma de available since issuance of the final rule indicates that the facility was idled early in 2011. Nevertheless, this fact does not invalidate the projection of 6.0 mill gallons we made in De cember 2010, since their facility was complete, operational, and had produced some volume at that time. As indicated by the removal of Bell BioEnergy and Cello Energy from the list of compan ies we considered in the final rule, and the addition of KiOr and Range Fuels to this same list, it is clear that projections made at any point in time for some companies may ultimately prove too high while the projections for other companies may ultimately prove too low.

This petition for reconsideration under CAA s ection 307(d) should be considered in the context of the specific statutory provisions related to the annual standard-setting process for theRFS program and the compliance flexibilities in the program. Congress established a standardsetting process for cellulosic biofuel that creates a considerably shorter leadtime than in most other EPA programs, and a standard that applie s for only a single year. We are required to project volumes of cellulosic biofuel and deter mine the applicable percentage standard by November 30 of the year before the annual standard applies. This structure is well designed to facilitate use of the most up-to-date information available before the standard goes into effect. InPage 149 of 184 other contexts, API and NPRA have argued that it is important that EPA not miss this November 30 deadline for setting the annual standards, so as to provide industry with all of the lead time in advance of the compliance year that is afforded by the statute. 93 Since the standard only applies for one year, a petition to reconsider can in practic e affect only that single year’s obligation, and given the late date at which it is established, necessarily woul d involve a modification of the annual standard during the year in which it is applicable. Importantly, the statute contains a number of safeguards in the event that an a nnual standard cannot be achieved. Under CAA section 211(o)(7)(D)(ii) and (iii), Congress esta blished a mechanism through which obligated parties can purchase credits from the EPA in lieu of acquiring cellulosic biofuel RINs. Obligated parties can also carry a deficit for cellulosi c biofuel into 2012 under certain conditions as stipulated in §80.1427(b). Finally, up to 20% of the 2011 cellulosic biofuel standard (1.2 million gallons) can be met with excess cellulosic biof uel RINs from 2010 under the rollover provisions of §80.1427(a)(5). Indeed, we have determined that at least 1.2 million excess cellulosic biofuel RINs from 2010 do exist, based on reports of rene wable fuel production in the first half of 2010 under the RFS1 regulations.

The panoply of compliance flexibilities provide d in the statute provides meaningful options for industry in the event that that actu al production of cellulosic biofuel in 2011, or any year, falls below EPA projected levels. This, combined with the relatively short period of time at issue for a petition to reconsider a one-year volume standard, and the fact that any change in the standards would occur within the year in whic h it applies, impacts the kind of circumstances under which it would be a ppropriate to reconsider the standa rd. The compliance flexibilities, the short time period at issue, and the disruption that would occur from a change in the standard

93 See NPRA v. EPA , (D.C. Cir., No 10-1071). slip op. at 37-39Page 150 of 184 within the compliance year, indicate that a relativel y larger change in circumstances with respect to cellulosic production would need to occu r before EPA would determine that new circumstances provide substantia l support for revising the volume standard for cellulosic biofuel for a specific year.

EPA believes that the single change that petitioners have iden tified in their petition, closure of the Range Fuels plant, is not of a su fficiently large magnitude to warrant a standard revision. It may be a substantial percentage of the volume standard, but it remains a relatively minor change compared to the total volume th at Congress mandated for 2011. After reducing that volume by 98%, the remaining change in ci rcumstances amounts to a generally small change in an absolute sense, compared to the total vol ume of renewable fuel and the transportation fuel covered by the RFS2 program. In addition, it can be reasonably addressed by industry through utilization of program flexibilities, including use of carry over credits from 2010, use of cellulosic biofuel RINs for 2011, and deficit carry over into 2012. This approach will avoid the disruption and lack of certainty in the program that could follow if EPA readily re-opened the annual standard to revision during the single year it applied base d on relatively small modifications resulting from an individual company’s plans. For all of the reasons described above, EPA proposes to deny the petition for re consideration of the 2011 cellulosic biofuel standard. EPA requests comment on this proposal.

While we are proposing to deny the petition to reconsider the cellulosic biofuel volume requirement for 2011, we neverthele ss must take into account the current status of the cellulosic biofuel industry when making our projections fo r 2012. This includes a review of the progressPage 151 of 184 being made in 2011 by the five companies we used to project the cellulosic biofuel volume of 6.0 mill gallons, including Range Fuels. As noted in Section II.B.1, based on the information we have obtained to date on the status of their fa cility in Soperton, Georgia, we have not included Range Fuels in the list of companies that we project could produce cellulosic biofuel in 2012. We do not believe that this is inconsistent w ith our proposal to deny the API/NPRA petition for reconsideration. Our proposal to deny the pe tition is based on the ava ilability of program flexibilities to allow industry to comply w ith the unadjusted 2011 standard, the relative magnitude of the change, and the desire to a void disruption in progra m implementation that would follow from EPA too readily re-opening the standard based on modifications in individual companies’ operation plans. Our proposed 2012 projections, on the other hand, are based on the best information available to us at this time, which includes the fact that the Range Fuel facility is not currently operating and we have been una ble to confirm its future operational status.

In a similar fashion, we do not believe that identifying the low end of the range of 2012 projected cellulosic biofuel volumes as 3.55 mill ga llons is inconsistent with our proposal to deny the API/NPRA petition for reconsideration. As described in Section II.B, we based the low end of the range for applicable 2012 volumes on consideration of only those facilities that are structurally complete at the time of this propos al and which anticipate commercial production of cellulosic biofuels by the end of 2011. While Range Fuel is structurally complete, they have not explicitly provided information to date indicating that they anticipate commercial production in 2011. Absent such information, for today's propo sal we have excluded Range Fuels from the low end of the range of potential volumes for 2012.Page 152 of 184 VII. Public Participation

We request comment on all aspects of this proposal. This section describes how you can participate in this process.

A. How Do I Submit Comments?

We are opening a formal comment period by publishing this document. We will accept comments during the period indicated under DATES in the first part of this proposal. If you have an interest in the proposed standards a nd technical amendments to the RFS regulations described in this document, we encourage you to comment on any aspect of this rulemaking. We also request comment on sp ecific topics identified throughout this proposal.

Your comments will be most useful if you include appr opriate and detailed supporting rationale, data, and analysis. Commenters are especially encouraged to provide specific suggestions for any changes that they believe ne ed to be made. You should send all comments, except those containing proprietary information, to our Air Docket (see ADDRESSES in the first part of this proposal) befo re the end of the comment period.

You may submit comments electronically, by mail, or through hand delivery/courier. To ensure proper receipt by EPA, identify the appropriate docket identification number in the subject line on the first page of your comment. Please ensure that your comments are submittedPage 153 of 184 within the specified comment period. Comments received after the close of the comment period will be marked “late.” EPA is not required to consider these late comments. If you wish to submit Confidential Business Information (CBI) or information that is otherwise protected by statute, please follow the instructions in Section VII.B.

B. How Should I Submit CBI to the Agency?

Do not submit information that you consider to be CBI electronically through the electronic public docket, www.regulations.gov, or by e-mail. Send or deliver information identified as CBI only to the following addr ess: U.S. Environmental Protection Agency, Assessment and Standards Division, 2000 Traver wood Drive, Ann Arbor, MI, 48105, Attention Docket ID EPA-HQ-OAR-2010-0133. You may claim information that you submit to EPA as CBI by marking any part or all of that information as CBI (if you submit CBI on disk or CD ROM, mark the outside of the disk or CD ROM as CBI and then identify electronically within the disk or CD ROM the specific information that is CBI). Information so marked will not be disclosed except in accordance with procedures set forth in 40 CFR part 2.

In addition to one complete version of the comments that include any information claimed as CBI, a copy of the comments that does not contain the information claimed as CBI must be submitted for inclusion in the public doc ket. If you submit the copy that does not contain CBI on disk or CD ROM, mark the outside of the disk or CD ROM clearly that it does not contain CBI. Information not marked as CB I will be included in th e public docket withoutPage 154 of 184 prior notice. If you have any questions about CBI or the procedures for claiming CBI, please consult the person identified in the FOR FURTHER INFORMATION CONTACT section.Page 155 of 184 VIII. Statutory and Ex ecutive Order Reviews

A. Executive Order 12866: Regulatory Planning and Review and Executive Order 13563: Improving Regulati on and Regulatory Review

Under Executive Order 12866 (58 FR 51735, October 4, 1993), this action is a "significant regulatory action.” Accordingly, EPA submitted this action to the Office of Management and Budget (OMB) for review under Executive Orders 12866 and 13563 (76 FR 3821, January 21, 2011) and any changes made in response to OMB recommendations have been documented in the docket for this action.

The economic impacts of the RFS2 program on regulated parties, including the impacts of the required volumes of rene wable fuel, were already addressed in the RFS2 final rule promulgated on March 26, 2010 (75 FR 14670). This action proposes the percentage standards applicable in 2012 based on the volumes that were analyzed in the RFS2 final rule. This action also proposes technical amendments to the RFS2 re gulations that have been determined to have no adverse economic impact on regulated par ties since they generally clarify existing requirements.

B. Paperwork Reduction ActPage 156 of 184 This action does not impose any new inform ation collection burden. While there are three proposed regulatory changes in today's NPRM that affect the recordkeeping and reporting burdens for regulated parties, we believe that the information collections already approved for the RFS2 program's general recordkeeping a nd reporting requirements, or the information collection already under review, would also cover the proposed changes in today's NPRM.

The proposed regulatory changes are listed in Table VIII.B-1.

Table VIII.B-1 Proposed Technical Amendments Affe cting Recordkeeping and Reporting Section Description

80.1449(a) Amended Production Outlook Report due date; added allowance for unregistered renewable fuel producers and importers to submit Pr oduction Outlook Reports.

80.1450(b)(1)(vi) Amended to require submission of additional evidence as part of registration to verify eligibility for exemptions in §80.1403(c) or (d).

80.1450(d)(1)-(d)(3) Amended to add more specifici ty on when updates, addenda, or resubmittals are required for engineering reviews and to include references to foreign ethanol producers.

With regard to production outlook reports, the chan ge in due date is not expected to have any impact on the reporting burden. In addition, EPA recently prepared an Information Collection Request (ICR) document to per mit the submission of voluntary production outlook reports by domestic and foreign renewable fuels producers. The parties affected by the ICR are not regulated parties under the RFS2 program. The ICR has been submitted for approval to OMB under the Paperwork Reduction Act , 44 U.S.C. 3501 et seq . and may be identified by EPA ICRPage 157 of 184 number 2409.01. Documents related to the ICR ha ve been placed in docket number EPA-HQOAR-2005-0161, which is accessible at http://www.regulations.gov

.

On October 14, 2010, EPA published a notice in the Federal Register announcing our intent to submit the proposed ICR for voluntar y production outlook reports to OMB for approval. (See 75 FR 63173). The 60-day comment period closed on December 14, 2010. No comments were received. On February 8, 2011, EPA pub lished a Federal Register notice announcing submission of the ICR to OMB. Additional comm ents were solicited via an additional comment period through March 10, 2011. 94

The Office of Management and Budget (O MB) has previously approved the information collection requirements contained in the existin g regulations at 40 CFR Part 80, Subpart M under the provisions of the Pa perwork Reduction Act , 44 U.S.C. 3501 et seq . This would include the following approved information collections (w ith OMB control numbers and expiration dates listed in parenthesis): “Renewable Fuels Standard Program: Petition and Registration” (OMB Control Number 2060-0367, expires March 31, 2013) ; “Renewable Fuels Standard (RFS2)” (OMB Control Number 2060-0640, expires July 31, 2013); “Regulations of Fuels and Fuel Additives: 2011 Renewable Fuels Standard – Pe tition for International Aggregate Compliance Approach” OMB Control Number 2060-0655, expi res February 28, 2014). Detailed and searchable information about these and other a pproved collections may be viewed on the Office of Management and Budget (OMB) Paperwork Reduction Act website, wh ich is accessible at

94 See “Agency Information Collection Activities; Submission to OMB for Review and Approval; Comment Request; Production Outlook Reports for Un-Registered Renewable Fuel Producers (New Collection),” 76 FR 6781 (February 8, 2011). The document identification number for this notice is EPA-HQ-OAR-2005-0161-3221. The document identification number for the supporting statement is EPA-HQ-OAR-2005-0161-3222.Page 158 of 184 http://www.reginfo.gov/public/do/PRAMain . With regard to the proposed changes in §80.1450, we believe that these information collections already approved for the RFS2 program's general recordkeeping and reporting requirements would also cover the proposed changes in today's
NPRM.

C. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) generally requires an agency to prepare a regulatory flexibility analysis of any rule subject to notice and comment rulemaking requirements under the Administra tive Procedure Act or any other statute unless the agency certifies that the rule will not have a significant economic imp act on a substantial number of small entities. Small entities include small businesses, small organizations, and small governmental jurisdictions.

For purposes of assessing the impacts of today's rule on small entities, small entity is defined as: (1) a small business as defined by the Small Bu siness Administration’s (SBA) regulations at 13 CFR 121.201; (2) a small governme ntal jurisdiction that is a government of a city, county, town, school district or special di strict with a population of less than 50,000; and (3) a small organization that is any not-for-profit enterprise which is i ndependently owned and operated and is not dominant in its field.Page 159 of 184 After considering the economic impacts of today’s proposed rule on small entities, we certify that this proposed action will not have a significant economic impact on a substantial number of small entities. This rule proposes the annual standard for cellulosic biofuels for 2012 and biomass-based diesel for 2013, regulatory pr ovisions for new RIN-generating pathways, and clarifying changes and minor technical amendments to the regulations. However, the impacts of the RFS2 program on small entities were already addressed in the RFS2 final rule promulgated on March 26, 2010 (75 FR 14670). Therefore, this proposed rule will not impose any additional requirements on small entities. We continue to be interested in the potential impacts of the proposed rule on small entities a nd welcome comments on issues related to such impacts.

D. Unfunded Mandates Reform Act

This rule does not contain a Federal mand ate that may result in expenditures of $100 million or more for State, local, and tribal governments, in the aggregate, or the private sector in
any one year
. Thus, this action is not subject to the requirements of sections 202 or 205 of
UMRA.

This action is also not subject to the re quirements of section 203 of UMRA because it contains no regulatory requirements that mig ht significantly or uniquely affect small governments.Page 160 of 184 E. Executive Order 13132: Federalism

This action does not have federalism implications. It will not have substantial direct effects on the States, on the relationship between the national government and the States, or on the distribution of power and responsibilities am ong the various levels of government, as specified in Executive Order 13132

. This action only applies to gasoline, diesel, and renewable fuel producers, importers, distributors and market ers and makes relatively minor corrections and modifications to the RFS2 regulations. Thus, Executive Order 13132 does not apply to this rule.

In the spirit of Executive Order 13132, and consistent with EPA policy to promote communications between EPA and State and lo cal governments, EPA specifically solicits comment on this proposed rule from State and local officials.

F. Executive Order 13175: Co nsultation and Coordination with Indian Tribal Governments

This action does not have tribal implicati ons, as specified in Executive Order 13175 (65 FR 67249, November 9, 2000)

. This proposed rule will be impleme nted at the Federal level and impose compliance costs only on transportation fuel refiners, blenders, mark eters, distributors, importers, exporters, and renewable fuel producer s and importers. Tribal governments would be affected only to the extent they purchase and use regulated fuels. Thus, Executive Order 13175 does not apply to this action.Page 161 of 184 EPA specifically solicits additional comment on th is proposed action from tribal officials.

G. Executive Order 13045: Protection of Children from Envi ronmental Health Risks and Safety Risks

EPA interprets EO 13045 (62 FR 19885, April 23, 1997) as applying only to those regulatory actions that concern health or safety risks, such that the analysis required under section 5-501 of the EO has the potential to influence the regulation. This action is not subject to EO 13045 because it does not establish an environm ental standard intended to mitigate health or safety risks and because it implements specific standards established by Congress in statutes.

H. Executive Order 13211: Ac tions Concerning Regulati ons That Significantly Affect Energy Supply, Distribution, or Use

This rule is not a “significant energy action” as defined in Executive Order 13211, “Actions Concerning Regulations That Significan tly Affect Energy Supply, Distribution, or Use” (66 FR 28355 (May 22, 2001)) because it is not likely to have a significant adverse effect on the supply, distribution, or use of energy.Page 162 of 184 I. National Technology Transfer Advancement Act

Section 12(d) of the National Technology Transfer and Advancement Act of 1995 (‘‘NTTAA’’), Public Law 104–113, 12(d) (15 U.S.C. 272 note) directs EPA to use voluntary consensus standards in its regulatory activities unless to do so would be inconsistent with applicable law or otherwise impractical. Volunt ary consensus standards are technical standards (e.g., materials specifications, test methods, sampling procedures, and business practices) that are developed or adopted by voluntary consensus st andards bodies. NTTAA directs EPA to provide Congress, through OMB, explanations when th e Agency decides not to use available and applicable voluntary consensus standards.

This proposed rulemaking does not involve te chnical standards. Therefore, EPA is not considering the use of any voluntary consensus standards.

J. Executive Order 12898: Federal Action s to Address Envi ronmental Justice in Minority Populations and Low-Income Populations

Executive Order (EO) 12898 (59 FR 7629 (Feb. 16, 1994)) establishes federal executive policy on environmental justice. Its main provisi on directs federal agencies, to the greatest extent practicable and permitted by law, to make environmental justice part of their mission by identifying and addressing, as a ppropriate, disproportionately high and adverse human health orPage 163 of 184 environmental effects of their programs, polic ies, and activities on minor ity populations and lowincome populations in the United States.

EPA has determined that this proposed rule will not have dispr oportionately high and adverse human health or environmental effects on minority or low-income populations because it does not affect the level of prot ection provided to human health or the environment. This action does not relax the control measures on sources re gulated by the RFS2 regulations and therefore will not cause emissions increases from these sources.Page 164 of 184 IX. Statutory Authority

Statutory authority for this action comes from section 211 of the Clean Air Act, 42 U.S.C. 7545. Additional support for the procedural and compliance related aspects of today's proposal, including the proposed recordkeeping requirements, come from sections 114, 208, and 301(a) of the Clean Air Act, 42 U.S.C. sections 7414, 7542, and 7601(a).

List of Subjects in 40 CFR Part 80

Environmental protection, Administrative prac tice and procedure, Air pollution control, Confidential Business Information, Diesel fuel, Fuel additives, Gasoline, Imports, Labeling, Motor vehicle pollution, Penaltie s, Petroleum, Reporting and recordkeeping requirements.

Dated:

Lisa P. Jackson, Administrator.Page 165 of 184 For the reasons set forth in the preamble, 40 CFR Part 80 is proposed to be amended as follows:

PART 80—REGULATION OF FUELS AND FUEL ADDITIVES

1. The authority citation for part 80 continues to read as follows: Authority: 42 U.S.C. 7414, 7542, 7545, and 7601(a).

§80.1275—[Amended] 2. In §80.1275, remove paragraph (d)(3).

Subpart M—[Amended] 3. Section 80.1401 is amended by revising th e definitions of “Annual cover crop” and “Naphtha” to read as follows:

§ 80.1401 Definitions. * * * * * Annual cover crop means an annual crop, planted as a rota tion between primary planted crops, or between trees and vines in orchards and vineyard s, typically to protect soil from erosion and to improve the soil between periods of regular crops . An annual cover crop has no existing market to which it can be sold except for its use as feedstock for the production of renewable fuel.
* * * * *Page 166 of 184 Naphtha means a blendstock falling within the boiling range of gasoline which is composed of only hydrocarbons, is commonly or commerciall y known as naphtha, and is used to produce gasoline.
* * * * *

4. Section 80.1405 is amended by revising paragr aphs (a) through (c) to read as follows:

§ 80.1405 What are the Renewable Fuel Standards? (a) (1) Renewable Fuel Standards for 2011. (i) The value of the cellulosic biofuel standard for 2011 shall be 0.003 percent. (ii) The value of the biomass-based dies el standard for 2011 shall be 0.69 percent. (iii) The value of the advanced biofuel standard for 2011 shall be 0.78 percent. (iv) The value of the renewable fuel standard for 2011 shall be 8.01 percent. (2) Renewable Fuel Standards for 2012. (i) The value of the cellulosic biofuel st andard for 2012 shall be 0.002-0.010 percent. (ii) The value of the biomass-based dies el standard for 2012 shall be 0.91 percent. (iii) The value of the advanced biofuel standard for 2012 shall be 1.21 percent. (iv) The value of the renewable fuel standard for 2012 shall be 9.21 percent. (b) EPA will calculate the value of the annua l standards and publish these values in the Federal Register by November 30 of the year preceding the compliance period. (c) EPA will calculate the annual renewable fuel percentage standards using the following equations:Where: Std CB,i = The cellulosic biofue l Std BBD,i = The biomass- b ased d i Std AB,i = The advanced biofuel Std RF,i = The renewable fuel st
RFV CB,i = Annual volume of cel i, or volume as adjust e RFV BBD,i = Annual volume of bi o year i, in gallons.
RFV AB,i = Annual volume of ad v i, in gallons.
RFV RF,i = Annual volume of re n in gallons.

Pag e l standard for year i, in percent.
i esel standard for year i, in percent. standard for year i, in percent. andard for year i, in percent. lulosic biofuel required by 42 U.S.C. 7545(o)(2) (

e d pursuant to 42 U.S.C. 7545(o)(7)(D), in gallo n

o mass-based diesel required by 42 U.S.C. 7545 (o

v anced biofuel required by 42 U.S.C. 7545(o)(2)(

n ewable fuel required by 42 U.S.C. 7545(o)(2)(B )

e 167 of 184 ( B) for year

n s.

)(2)(B) for

B) for year

) for year i,Page 168 of 184 G i = Amount of gasoline projected to be used in the 48 contiguous states and Hawaii, in year i, in gallons.
D i = Amount of diesel projected to be used in the 48 contiguous states and Hawaii, in year i, in gallons.
RG i = Amount of renewable fuel blended into ga soline that is projected to be consumed in the 48 contiguous states and Hawaii, in year i, in gallons.
RD i = Amount of renewable fuel ble nded into diesel that is projected to be consumed in the 48 contiguous states and Hawaii, in year i, in gallons.
GS i = Amount of gasoline projected to be used in Alaska or a U.S. territory, in year i, if the state or territory has opted-in or opts-in, in gallons.
RGS i = Amount of renewable fuel blended into ga soline that is projected to be consumed in Alaska or a U.S. territory, in year i, if the state or territory opts-in, in gallons.
DS i = Amount of diesel projected to be used in Alaska or a U.S. territory, in year i, if the state or territory has opted-in or opts-in, in gallons.
RDS i = Amount of renewable fuel blended into dies el that is projected to be consumed in Alaska or a U.S. territory, in year i, if the state or territory opts-in, in gallons.
GE i = The amount of gasoline projected to be produced by exempt small refineries and small refiners, in year i, in gallons in any year they are exempt per §§80.1441 and
80.1442.
DE i = The amount of diesel fuel projected to be produced by exempt small refineries and small refiners in year i, in gallons, in any year they are exempt per §§80.1441 and 80.1442.
* * * * *Page 169 of 184 5. Section 80.1415 is amended by revising paragraph (c)(2) to read as follows:

§ 80.1415 How are equivalence values a ssigned to renewable fuel? * * * * * (c) * * * (2) The application for an equivalence value shall include a technical justification that includes all the following: (i) A calculation for the requested equivalence value according to the equation in paragraph (c)(1) of this section, including supporting docum entation for the value of EC used in the calculation such as a certificate of analysis from a laboratory that verifies the lower heating value in Btu per gallon of the renewable fuel produced. (ii) For each feedstock, component, or additive that is used to make the renewable fuel, provide a description, the percent input, and identify whether or not it is renewable biomass or is derived from renewable biomass. (iii) For each feedstock that also qualifies as a renewable fuel, state whether or not RINs have been previously generated for such feedstock. (iv) A description of the renewable fuel a nd the production process, including a block diagram that shows all inputs and outputs at each step of the production process with a sample quantity of all input s and outputs for one batch of renewable fuel produced.
* * * * *Page 170 of 184 6. Section 80.1426 is amended as follows: a. By revising paragraph (f)(1). b. By revising Table 1 to §80.1426. c. By revising paragraphs (f)(5)(ii)(A) and (f)(5)(ii)(B).

§ 80.1426 How are RINs generated and assigned to batches of renewable fuel by renewable fuel producers or importers?

* * * * * (f) * * * (1) Applicable pathways. D codes shall be used in RINs generated by producers or importers of renewable fuel according to the pathways listed in Table 1 to this section, paragraph (f)(6) of this section, or as approved by the Administrator. In choos ing an appropriate D code, producers and importers may disregar d any incidental, de minimis feedstock contaminants that are impractical to rem ove and are related to customary feedstock production and transport. Tabl es 1 and 2 to this section do not apply to, and impose no requirements with respect to, volumes of fuel for which RINs are generated pursuant to paragraph (f)(6) of this section.

Table 1 to §80.1426—Applicable D Codes for Each Fuel Pathway for Use in Generating RINs

Fuel type Feedstock Production process requirements DCode A Ethanol Corn starch All of the following: Dry mill process, using natural gas, biomass, or biogas for process energy 6Page 171 of 184 and at least two advanced technologies from Table 2 to this section B Ethanol Corn starch All of the following: Dry mill process, using natural gas, biomass, or biogas for process energy and at least one of the advanced technologies from Table 2 to this section plus drying no more than 65% of the distillers grains with solubles it markets annually 6

C Ethanol Corn starch All of the following: Dry mill process, using natural gas, biomass, or biogas for process energy and drying no more than 50% of the distillers grains with solubles it markets annually 6

D Ethanol Corn starch Wet mill process using biomass or biogas for process energy 6 E Ethanol Starches from crop residue and annual covercrops Fermentation using natural gas, biomass, or biogas for process energy 6 F Biodiesel, and renewable diesel Soy bean oil; Oil from annual covercrops; Algal oil; Biogenic waste oils/fats/greases; Non-food grade corn oil One of the following: Trans-Esterification Hydrotreating Excluding processes that co-process renewable biomass and petroleum 4

G Biodiesel Canola/Rapeseed oil Trans-Esterification using natural gas or biomass for process energy 4 H Biodiesel, and renewable diesel Soy bean oil; Oil from annual covercrops; Algal oil; Biogenic waste oils/fats/greases; Non-food grade corn oil One of the following: Trans-Esterification HydrotreatingIncludes only processes that coprocess renewable biomass and petroleum 5

I Ethanol Sugarcane Fermentation 5 J Ethanol Cellulosic Biomass from crop residue, slash, pre-commercial thinnings and tree residue, annual covercrops, switchgrass, and miscanthus; cellulosic components of separated yard waste; cellulosic components of separated food waste; and cellulosic components of separated MSW Any 3

K Cellulosic Diesel, Jet Fuel and Heating Oil Cellulosic Biomass from crop residue, slash, pre-commercial thinnings and tree residue, annual covercrops, switchgrass, and miscanthus; cellulosic components of separated yard waste; cellulosic components of separated food waste; and cellulosic components of separated MSW Any 7

L Butanol Corn starch Fermentation; dry mill using natural gas, biomass, or biogas for process energy 6

M Cellulosic Naphtha Cellulosic Biomass from crop residue, slash, pre-commercial thinnings and tree residue, annual covercrops, switchgrass, and miscanthus; cellulosic components of Fischer-Tropsch process 3Page 172 of 184 separated yard waste; cellulosic components of separated food waste; and cellulosic components of separated MSW N Ethanol, renewable diesel, jet fuel, heating oil, and naphtha The non-cellulosic portions of separated food waste Any 5

O Biogas Landfills, sewage waste treatment plants, manure digesters Any 5

* * * * * (5) * * * (ii) (A) A feedstock qualifies under paragraph (f)(5)(i)(A) or (f)(5)(i)(B) of this section only if it is collected according to a plan submitted to and accepted by U.S. EPA under the registration procedures specified in §80.1450(b)(1)(vii). (B) A feedstock qualifies under paragraph (f)(5)(i )(C) of this section only if it is collected according to a plan submitted to and approved by U.S. EPA.
* * * * *

7. Section 80.1429 is amended by revising paragrap hs (b)(2) and (b)(9) introductory text to read as follows:

§ 80.1429 Requirements for separating RINs from volumes of renewable fuel. * * * * * (b) * * * (2) Except as provided in paragraph (b)(6) of th is section, any party that owns a volume of renewable fuel must separate any RINs that have been assigned to that volume once thePage 173 of 184 volume is blended with gasoline or fossil-ba sed diesel to produce a transportation fuel, heating oil, or jet fuel. A party may se parate up to 2.5 RINs per gallon of blended renewable fuel.
* * * * * (9) Except as provided in paragraphs (b)(2) thro ugh (b)(5) and (b)(8) of this section, parties whose non-export renewable volume obligations are solely related to either the importation of products liste d in §80.1407(c) or §80.1407(e) or to the addition of blendstocks into a volume of finished gasolin e, finished diesel fuel, RBOB, or CBOB, can only separate RINs from volumes of re newable fuel if the number of gallon-RINs separated in a calendar year is less than or equal to a limit set as follows:
* * * * *

8. Section 80.1449 is amended by revising para graph (a) introductory text to read as follows:

§ 80.1449 What are the Production Outlook Report requirements? (a) By June 1 of each year (September 1 for the report due in 2010), a registered renewable fuel producer or importer must submit and an unregistered renewable fuel producer may submit all of the following information for each of its facilities, as applicable, to EPA:
* * * * *

9. Section 80.1450 is amended as follows:Page 174 of 184 a. By revising paragraph (b)(1)(vi). b. By revising paragraphs (d)(1)-(d)(3).

§ 80.1450 What are the registration requirements under the RFS program? * * * * * (b) * * * (1) * * * (vi) For facilities claiming the exemption described in §80.1403(c) or (d), evidence demonstrating all of the following: (A) The date that construction commenced (a s defined in §80.1403(a)(1)), including all the following: (1 ) Contracts with construc tion and other companies. (2 ) Applicable air permits issued by the U.S. Environmental Protection Agency, state, local air pollution control agencies, or foreign g overnmental agencies that governed the construction and/or operation of the renewable fuel facility during construction and when first operated. (B) That construction was not discontinued for a period of 18 months after commencement of construction. (C) That construction was completed by December 19, 2010, for facilities claiming an exemption pursuant to §80.1403(c); or w ithin 36 months of commencement of construction for facilities claiming an exemption pursuant to §80.1403(d). (D) Other documentation and information as requested by the Administrator.
* * * * *Page 175 of 184 (d) * * * (1) Any producer of renewable fuel, and any fo reign ethanol producer who makes changes to his facility that will allow him to produce re newable fuel, as defined in §80.1401 that is not reflected in the producer's registration in formation on file with EPA must update his registration information and submit a copy of an updated independent third-party engineering review on file with EPA at least 60 days prior to producing the new type of renewable fuel. The producer may also s ubmit an addendum to the independent thirdparty engineering review on file with EPA provided the addendum meets all the requirements in paragraph (b)(2) of this sec tion and verifies for EP A the most up-to-date information at the producer’s existing facility. (2) Any producer of renewable fuel and any foreign ethanol producer who makes any other changes to a facility that will affect the pr oducer's registration information but will not affect the renewable fuel category for which the producer is registered per paragraph (b) of this section must update his registrati on information 7 days prior to the change. (3) All producers of renewable fuel and fore ign ethanol producers must update registration information and submit an update d independent third-party engineering review according to the schedule in paragraph (d)(3)(i) or (d )(3)(ii) of this section, and including the information specified in paragraph (d)(3)(iii) of this section: (i) For all producers of renewable fuel and fo reign ethanol producers registered in calendar year 2010, the updated registration informati on and independent third-party engineering review shall be submitted to EPA by Octobe r 1, 2013, and by October 1 of every third calendar year thereafter; orPage 176 of 184 (ii) For all producers of renewable fuel and foreign ethanol producers registered in any calendar year after 2010, the updated registrati on information and inde pendent third-party engineering review shall be submitted to EPA by October 1 of every third calendar year after the first year of registration. (iii) In addition to conducting the engineerin g review and written re port and verification required by paragraph (b)(2) of this sec tion, the updated inde pendent third-party engineering review shall include a detailed review of the renewable fuel producer's calculations used to determine V RIN of a representative sample of batches of each type of renewable fuel produced since the last regist ration. The representative sample shall be selected in accordance with the sample size guidelines set forth at §80.127.
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10. Section 80.1451 is amended by revising pa ragraph (a)(1)(xi) to read as follows:

§ 80.1451 What are the reporting requirements under the RFS program? (a) * * * (1) * * * (xi) A list of all RINs generated prior to July 1, 2010 that were retired for compliance in the reporting period.
* * * * *Page 177 of 184 11. Section 80.1452 is amended revisi ng paragraphs (b)(2), (b)(4), and (b)(5) to read as follows:

§ 80.1452 What are the requirements related to the EPA Moderated Transaction System (EMTS)? * * * * * (b) * * * (2) The EPA company registration number of the renewable fuel producer or foreign ethanol producer, as applicable.
* * * * * (4) The EPA facility registration number of the facility at which the renewable fuel producer or foreign ethanol producer produc ed the batch, as applicable. (5) The EPA facility registration number of the importer that imported the batch, if applicable.
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12. Section 80.1460 is amended by adding a ne w paragraph (b)(6) to read as follows:

§ 80.1460 What acts are prohibit ed under the RFS program? * * * * * (b) * * * (6) Generate a RIN for fuel for which RI Ns have previously been generated.Page 178 of 184 * * * * *

13. Section 80.1464 is amended as follows: a. By revising paragraphs (a)(2) introductory text and (a)(2)(i). b. By adding paragraphs (a)(2)(iii) and (a)(2)(iv). c. By revising paragraph (a)(3)(ii). d. By revising paragraphs (b)(2) introductory text and (b)(2)(i). e. By adding paragraphs (b)(2)(iii) and (b)(2)(iv). f. By revising paragraph (b)(3)(ii). g. By revising paragraph (c)(1) introductory text. h. By adding paragraphs (c)(1)(iii) and (c)(1)(iv).

§ 80.1464 What are the attest engagement requirements under the RFS program?

* * * * * (a) * * * (2) RIN Transaction Reports a nd Product Transfer Documents. (i) Obtain and read copies of a representative sample, selected in accordance with the guidelines in §80.127, of each RIN transaction type (RINs purchased, RINs sold, RINs retired, RINs separated, RINs reinstated) incl uded in the RIN transaction reports required under §80.1451(a)(2) for the compliance year.
* * * * *Page 179 of 184 (iii) Verify that the product transfer documents for the representative samples under paragraph (a)(2)(i) of this section of RINs sold and the RINs purchased contain the applicable information required under §80.1453 and report as a finding any product transfer document that does not contain the required information. (iv) Verify the accuracy of the information contained in the product transfer documents reviewed pursuant to paragraph (a)(2)(iii) of this section and report as a finding any exceptions. (3) * * * (ii) Obtain the database, spreadsheet, or other documentation used to generate the information in the RIN activity reports; compare the RIN transaction samples reviewed under paragraph (a)(2) of this section with the corresponding entries in the database or spreadsheet and report as a finding any di screpancies; compute the total number of current-year and prior-year RINs owned at th e start and end of each quarter, purchased, separated, sold, retired and rein stated, and for parties that reported RIN activity for RINs assigned to a volume of renewable fuel, th e volume and type of renewable fuel (as defined in §80.1401) owned at the end of ea ch quarter; as represented in these documents; and state whether this information agrees with the party's reports to EPA. (b) * * * (2) RIN Transaction Reports a nd Product Transfer Documents. (i) Obtain and read copies of a representative sample, selected in accordance with the guidelines in §80.127, of each transaction type (RINs purchased, RINs sold, RINs retired, RINs separated, RINs reinstated) included in the RIN transaction reports required under §80.1451(b)(2) for the compliance year.Page 180 of 184 * * * * * (iii) Verify that the product transfer documents for the representative samples under paragraph (b)(2)(i) of this section of RINs sold and the RINs purchased contain the applicable information required under §80.1453 and report as a finding any product transfer document that does not contain the required information. (iv) Verify the accuracy of the information contained in the product transfer documents reviewed pursuant to paragraph (b)(2)(iii) of this section and report as a finding any exceptions. (3) * * * (ii) Obtain the database, spreadsheet, or other documentation used to generate the information in the RIN activity reports; compare the RIN transaction samples reviewed under paragraph (b)(2) of this section with th e corresponding entries in the database or spreadsheet and report as a finding any disc repancies; report the total number of each RIN generated during each quarter and comput e and report the total number of currentyear and prior-year RINs owned at the start and end of each quarter, purchased, separated, sold, retired and rein stated, and for parties that reported RIN activity for RINs assigned to a volume of renewable fuel, the volume of renewable fuel owned at the end of each quarter, as represented in these documents; and state whether this information agrees with the party's reports to EPA.
* * * * * (c) * * * (1) RIN Transaction Reports a nd Product Transfer Documents.
* * * * *Page 181 of 184 (iii) Verify that the product transfer documents for the representative samples under paragraph (c)(1)(i) of this section of RINs sold and RINs purchased contain the applicable information required under §80.1453 and report as a finding any product transfer document that does not contain the required information. (iv) Verify the accuracy of the information contained in the product transfer documents reviewed pursuant to paragraph (c)(1)(iii) of this section and report as a finding any exceptions.
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14. Section 80.1465 is amended by revising paragraph (h)(2) to read as follows:

§ 80.1465 What are the additional requirements under this subpart for foreign small refiners, foreign small refineries, and importers of RFS–FRFUEL? * * * * * (h) * * * (2) Bonds shall be posted by any of the following methods: (i) Paying the amount of the bond to the Treasurer of the United States. (ii) Obtaining a bond in the proper amount from a third party surety agent that is payable to satisfy United States administrative or judicial judgments against the foreign refiner, provided EPA agrees in advance as to the third party and the nature of the surety agreement. * * * * *Page 182 of 184 15. Section 80.1466 is amended by revising paragraph (h)(2) to read as follows:

§ 80.1466 What are the additional requirements under this subpart for RINgenerating foreign producers and importers of renewable fuels for which RINs have been generated by the foreign producer? * * * * * (h) * * * (2) Bonds shall be posted by any of the following methods: (i) Paying the amount of the bond to the Treasurer of the United States. (ii) Obtaining a bond in the proper amount from a third party surety agent that is payable to satisfy United States administrative or judi cial judgments against the foreign producer, provided EPA agrees in advance as to the third party and the nature of the surety agreement. * * * * *

16. Section 80.1467 is amended by revising paragrap hs (e)(1), (e)(2), and (g)(2) to read as follows:

§ 80.1467 What are the additional requirement s under this subpart for a foreign RIN owner? * * * * *Page 183 of 184 (e) * * * (1) The foreign entity shall post a bond of the amount calculated using the following equation: Bond = G * $ 0.01 Where: Bond = Amount of the bond in U.S. dollars. G = The total of the number of gallon-RINs the foreign entity expects to obtain, sell, transfer or hold during the first calendar year that th e foreign entity is a RIN owner, plus the number of gallon-RINs the foreign entity exp ects to obtain, sell, transfer or hold during the next four calendar years. After the firs t calendar year, the bond amount shall be based on the actual number of gallon-RINs obtained, sold, or transferred so far during the current calendar year plus the number of gallon-RINs obtained, sold, or transferred during the four calendar years immediately preceding the current calendar year. For any year for which there were fewer than four preceding years in which the foreign entity obtained, sold, or transferred RINs, the bond sh all be based on the to tal of the number of gallon-RINs sold or transferred so far during the current calendar year plus the number of gallon-RINs obtained, sold, or transferred during any immediately preceding calendar years in which the foreign entity owned RINs, plus the number of gallon-RINs the foreign entity expects to obtain, sell or transf er during subsequent calendar years, the total number of years not to exceed four cale ndar years in addition to the current calendar
year. (2) Bonds shall be posted by any of the following methods: (i) Paying the amount of the bond to the Treasurer of the United States.Page 184 of 184 (ii) Obtaining a bond in the proper amount from a third party surety agent that is payable to satisfy United States administrative or judicial judgments against the foreign RIN owner, provided EPA agrees in advance as to the third party and the nature of the surety agreement. * * * * * (g) * * * (2) Any RIN that is obtained, sold, transferred, or held that is in excess of the number for which the bond requirements of this section have been satisfied is an invalid RIN under §80.1431. * * * * *